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, 1995 or [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Commission file number 1-7784 CENTURY TELEPHONE ENTERPRISES, INC. A Louisiana Corporation I.R.S. Employer Identification No. 72-0651161 100 Century Park Drive, Monroe, Louisiana 71203 Telephone number (318) 388-9500 Securities registered pursuant to Section 12(b) of the Act: Common Stock, par value $1.00 Exchange on which registered: New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] As of February 29, 1996, 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 $2.0 billion. As of February 29, 1996, there were 59,339,041 shares of common stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE: Portions of the Proxy Statement prepared in connection with the 1996 annual meeting of shareholders are incorporated in Part III of this Report. PART I Item 1. Business General. Century Telephone Enterprises, Inc. ("Century") is a regional diversified telecommunications company that is primarily engaged in providing traditional telephone services and cellular telephone communications services. For the year ended December 31, 1995, telephone operations and mobile communications operations (cellular operations) provided 65% and 31%, respectively, of the consolidated revenues of Century and its subsidiaries (the "Company"). All of the Company's operations are conducted within the continental United States. At December 31, 1995, the Company's telephone subsidiaries operated over 480,000 telephone access lines, primarily in rural, suburban and small urban areas in 14 states, with the largest customer bases located in Wisconsin, Louisiana, Michigan and Ohio. According to published sources, the Company is the sixteenth largest local exchange telephone company in the United States based on the number of access lines served. Whenever used herein with respect to the Company, the term "pops" means the population of licensed cellular telephone markets (based on independent third-party population estimates) multiplied by the Company's proportionate equity interests in the licensed operators thereof. The term "MSA" means a Metropolitan Statistical Area for which the Federal Communications Commission (the "FCC") has granted a cellular operating license. The term "RSA" means a Rural Service Area for which the FCC has granted a cellular operating license. The term "wireline license" refers to the cellular operating license initially reserved by the FCC for companies providing local telephone service in the licensed market and the term "non-wireline license" refers to the license initially reserved for licensees unaffiliated with such local telephone companies. At December 31, 1995, the Company, through its cellular operations, owned approximately 7.6 million pops in 27 MSAs, primarily concentrated in Michigan, Louisiana, Mississippi and Texas, and 29 RSAs, most of which are in Michigan, Louisiana and Arkansas. The Company is the majority owner and operator in 19 of the MSAs and 18 of the RSAs, which collectively represent 6.4 million pops, and has minority interests in the other MSAs and RSAs, which collectively represent 1.2 million pops. Of the Company's 7.6 million pops, approximately 72% are attributable to the Company's MSA interests, with the balance attributable to its RSA interests. According to data derived from published sources, at September 30, 1995 the Company was the fifteenth largest cellular telephone company in the United States based on the Company's owned pops. At December 31, 1995, the Company's majority-owned and operated cellular systems had more than 290,000 cellular subscribers. Except for five MSAs and two RSAs, all of the cellular systems operated by the Company are operated under wireline licenses. The Company also provides long distance, operator and interactive services in certain local and regional markets, as well as certain printing and related services, and has recently entered the competitive access business. Recent Acquisitions and Dispositions. In January 1995 Century acquired Tele-Max, Inc. and its affiliates. In connection with this acquisition, Century acquired approximately 5,300 telephone access lines in a suburban community north of Dallas, Texas and a one-half of one percent interest in the Dallas MSA wireline cellular system (which represented approximately 20,000 pops). In the third quarter of 1995 the Company acquired 100% of the Michigan RSA #4 wireline cellular system, along with the non-wireline cellular systems in Mississippi RSA #2 and Mississippi RSA #6, which, at December 31, 1995, had populations of 131,100, 242,800 and 182,600, respectively. Mississippi RSA #6 is adjacent to the Jackson, Mississippi MSA that the Company operates; Mississippi RSA #2 is located in northeastern Mississippi between Memphis, Tennessee and Birmingham, Alabama. Michigan RSA #4 is located in northeastern Michigan and is adjacent to other markets the Company operates. In accordance with its strategy of clustering its telephone and cellular businesses, during 1995 the Company sold its ownership interests in several RSAs located primarily in western states and three MSAs located in the midwest, which in the aggregate represented approximately 250,000 pops. The Company is continually evaluating the possibility of acquiring additional telephone access lines and cellular interests in exchange for cash, securities or both. Although the Company's primary focus will continue to be on acquiring telephone and cellular interests that are proximate to its properties or that serve a customer base large enough for the Company to operate efficiently, other communications interests may also be acquired. Other. As of December 31, 1995, the Company employed approximately 3,100 persons, of which approximately 200 employees located in Ohio are covered by a three-year collective bargaining agreement between the Company and the Communications Workers of America. The agreement lapses on March 30, 1997. Century was incorporated under Louisiana law in 1968 to serve as a holding company for several telephone companies acquired over the previous 15 to 20 years. Century's principal executive offices are located at 100 Century Park Drive, Monroe, Louisiana 71203 and its telephone number is (318) 388-9500. TELEPHONE OPERATIONS The Company is the sixteenth largest local exchange telephone company in the United States, based on the more than 480,000 access lines it served at December 31, 1995. Currently, the Company operates over 500 central office and remote switching centers in its telephone operating areas. Over the past decade, Century has installed digital switching platforms throughout most of its switching network. At December 31, 1995, 99% of Century's total access lines were digitally switched. Through its operating telephone subsidiaries, Century provides services to predominately rural, suburban and small urban markets in 14 states. The table below sets forth certain information with respect to Century's access lines as of December 31, 1995: <TABLE> <CAPTION> Number of Percent of Percent State access lines access lines digital - --------------------------------------------------------------------------- <S> <C> <C> <C> Wisconsin 101,119 21% 100% Louisiana 87,733 18 100 Michigan 83,657 18 100 Ohio 72,719 15 100 Arkansas 39,185 8 100 Texas 37,434 8 100 Tennessee 22,514 5 100 Mississippi 14,635 3 100 Colorado 6,370 1 100 New Mexico 4,927 1 74 Indiana 4,734 1 100 Idaho 4,051 1 100 Arizona 1,503 0 0 Iowa 176 0 100 - -------------------------------------------------------------------------- 480,757 100% 99% ========================================================================== </TABLE> As indicated in the following table, Century has experienced growth in its telephone operations over the past several years, a substantial portion of which was attributable to acquisitions of other telephone companies and to the expansion of services: <TABLE> <CAPTION> Year Ended or As of December 31, - -------------------------------------------------------------------------------- 1995 1994 1993 1992 1991 - -------------------------------------------------------------------------------- (Dollars in thousands) <S> <C> <C> <C> <C> <C> Access lines 480,757 454,963 434,691 397,300 314,819 % Residential 78% 79 80 81 81 % Business 22% 21 20 19 19 Operating revenues $ 419,242 391,265 350,330 298,812 236,408 Capital expenditures $ 136,006 152,336 131,180 108,974 73,913 </TABLE> Future growth in telephone operations is expected to be derived from (i) acquiring additional telephone companies, (ii) providing service to new customers, (iii) increasing network usage and (iv) providing additional services made possible by advances in technology and changes in regulation. For information on developing competitive trends, see "-Regulation and Competition." Services The Company's telephone subsidiaries derive revenue from providing (i) local telephone services, (ii) network access and long distance services and (iii) other related services. The following table reflects the percentage of telephone operating revenues derived from these respective services: 1995 1994 1993 - ------------------------------------------------------------------------ Local service 26.6% 25.6 25.3 Network access and long distance 61.7 62.3 62.0 Other 11.7 12.1 12.7 - ------------------------------------------------------------------------ 100.0% 100.0 100.0 ======================================================================== Local service revenues are generated by the provision of local exchange telephone services in the Company's franchised service areas. Network access and long distance revenues primarily relate to services provided by the Company to interexchange carriers (long distance carriers) in connection with the use of the Company's facilities to originate and complete interstate and intrastate long distance telephone calls. Most of the Company's interstate network access revenues are derived through pooling arrangements administered by the National Exchange Carrier Association ("NECA"). The NECA receives access charges billed by the Company and other participating local exchange carriers ("LECs") to interstate long distance carriers and other LEC customers for their use of the local exchange network to complete long distance calls and subsequently distributes these revenues to such LECs based primarily on cost separation studies. The charges billed to the long distance carriers and other LEC customers are based on tariffed access rates filed with the FCC by the NECA on behalf of the Company and other participating LECs. Interstate revenues as a percentage of telephone operating revenues amounted to 34.6%, 33.5% and 32.0% in 1995, 1994 and 1993, respectively. Certain of the Company's intrastate network access revenues are derived through access charges billed by the Company directly to intrastate long distance carriers and other LEC customers. Such intrastate network access charges are based on access tariffs which are subject to state regulatory commission approval. Additionally, certain of the Company's intrastate network access revenues, along with intrastate long distance revenues, are derived through state pooling arrangements and are determined based on cost separation studies or special settlement arrangements. The installation of digital switches and related software 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 1995 and early 1996, the Company continued to expand its list of premium services (such as voice mail and internet access) offered in certain service areas and aggressively marketed these services. The Company is installing fiber optic cable in high traffic routes in certain areas in which it operates and has provided alternative routing of telephone service over fiber optic cable networks in several of its strategic operating areas. At December 31, 1995, the Company had over 2,000 miles of fiber optic cable in place. Other revenues include revenues related to (i) leasing, selling, installing, maintaining and repairing customer premise telecommunications equipment and wiring, (ii) providing billing and collection services for interexchange carriers, (iii) leasing network facilities and (iv) participating in the publication of local directories. Certain large telecommunications companies for which the Company currently provides billing and collection services continue to indicate their desire to reduce their billing and collection expenses, which is expected to result in future reductions of billing and collection revenues. For further information on the regulation of the Company's revenues, see "-Regulation and Competition." Federal Financing Programs Certain of the Company's telephone subsidiaries receive long-term financing from the Rural Utilities Service ("RUS") and the Rural Telephone Bank ("RTB"). The RUS has made long-term loans to telephone companies since 1949 for the purpose of improving telephone service in rural areas. The RUS continues to make new loans at interest rates that range from 5% to 7% based on borrower qualifications and the cost of money to the United States government. The RTB, established in 1971, makes long-term loans at interest rates based on its average cost of funds as determined by statutory formula (such rates ranged from 6.04% to 6.88% for the fiscal year ended September 30, 1995), and in some cases makes loans concurrently with RUS loans. Most of the Company's telephone plant is pledged or mortgaged to secure obligations of the Company's telephone subsidiaries to the RUS and RTB. The Company's telephone subsidiaries which have borrowed from government agencies generally may not loan or advance any funds to Century, but may pay dividends if certain financial ratios are met. For additional information regarding the Company's financing, see the Company's consolidated financial statements included in Item 8 herein. Regulation and Competition Traditionally, LECs have operated as regulated monopolies. Consequently, the majority of the Company's telephone operations are regulated extensively by various state regulatory agencies (generally called public service commissions or public utility commissions) and by the FCC. As discussed in greater detail below, passage of the Telecommunications Act of 1996 (the "1996 Act"), coupled with state legislative and regulatory initiatives and technological changes, has fundamentally altered the telephone industry by reducing the regulation of LECs and permitting competition in each segment of the telecommunications industry. Although Century anticipates that these trends towards reduced regulation and increased competition will continue, the form and degree of future regulation and competition in the Company's franchised service areas cannot be ascertained at this time. State Regulation. The local service rates and intrastate access charges of substantially all of the Company's telephone subsidiaries are regulated by state regulatory commissions that traditionally have regulated pricing through "rate of return" regulation that focuses on authorized levels of earnings by LECs. Most of these commissions also (i) regulate the purchase and sale of LECs, (ii) prescribe depreciation rates and certain accounting procedures and (iii) regulate various other matters, including certain service standards and operating procedures. In certain states, construction and/or financing plans are also subject to regulatory approval. In recent years, Ohio, Michigan, Wisconsin, Louisiana and other state legislatures and regulatory commissions having jurisdiction over the Company's telephone subsidiaries have either begun to reduce the regulation of LECs or have announced their intention to review such regulation, and it is expected that this trend will continue. This reduced regulatory oversight of certain of the Company's telephone operations may allow the Company to offer new and competitive services faster than under the traditional regulatory process. Coincident with these efforts is the introduction of competition into traditionally monopolistic segments of the industry. For a discussion of legislative, regulatory and technological changes that have introduced competition into the local exchange industry, see "-Developments Affecting Competition." Substantially all of the state regulatory commissions have statutory authority, the specific limits of which vary, to initiate and conduct earnings reviews of the LECs that they regulate. As part of the movement towards deregulation, several states are moving away from traditional rate of return regulation towards price cap regulation and incentive regulation (which are similar to the FCC regulations discussed below), and are actively encouraging larger LECs to adopt these newer forms of price regulation. The continuation of this trend may lead to fewer earnings reviews in the future. Currently, however, most of the Company's LECs continue to be regulated under rate of return regulation. During 1995 the Louisiana Public Service Commission ("LPSC") culminated its two-year investigation into the earnings of independent telephone companies in Louisiana by adopting a new regulatory plan for such companies effective July 1, 1995. For additional information, see Regulation and Competition in Item 7 herein. As stated in Item 7, the Company anticipates that the impact of these changes will adversely affect its results of operations and there is no assurance that the effect will not be material. In addition, there is no assurance that future reviews, in Louisiana or in other states, will not lead to future revenue reductions or customer refunds. Also, in light of the movement away from traditional rate of return regulation, no assurance can be given that the Company's LECs will continue to earn the same rate of return that they achieved in recent years. FCC Regulation. The FCC regulates the interstate services provided by the Company's telephone subsidiaries primarily by regulating the interstate access charges that are billed to interexchange carriers and other LEC customers by the Company for use of its local network in connection with the origination and termination of interstate telephone calls. Additionally, the FCC has prescribed certain rules and regulations for telephone companies, including regulations regarding the use of radio frequencies; a uniform system of accounts; and rules regarding the separation of costs between jurisdictions and, ultimately, between services. Effective January 1, 1991, the FCC adopted price-cap regulation relating to interstate access rates for the Regional Bell Operating Companies ("RBOCs") and GTE 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 incentive regulatory plan, but will continue to evaluate its options on a periodic basis. Consequently, 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. High-Cost Support Funds, Revenue Pools and Related Matters. A significant number of the Company's telephone subsidiaries recover a portion of their costs under federal and state cost recovery mechanisms that traditionally have allowed LECs serving small communities and rural areas to provide access to telecommunications services reasonably comparable to those available in urban areas and at reasonably comparable prices. The FCC and certain state regulatory commissions have recently explored or implemented initiatives to evaluate or reduce the funding of certain of these cost recovery mechanisms. In December 1993 the FCC adopted interim provisions which placed certain limitations on the FCC's Universal Service Fund ("USF") growth rate, including a cap which has been extended through mid-1996. The Company anticipates that revenues from the USF under these interim provisions will continue to increase in the near term, but at a lesser percentage rate than that associated with recent prior periods. In July 1995 the FCC sought comments on proposals and policy changes relating to certain federal high-cost assistance mechanisms that provide substantial revenues to the Company, including the USF. The FCC's stated goals are to ensure that universal service can be maintained, but still hold the total level of assistance to a reasonable level and, where possible, reduce barriers to competitive entry and to promote efficient investment in and operation of local service networks. In February 1996 the United States Congress enacted the 1996 Act which provides, among other things, that a federal-state joint board review existing universal service support mechanisms and recommend changes to the FCC regulations in order that such regulations will be consistent with the universal service principles in the 1996 Act. The 1996 Act provides that all telecommunications carriers providing interstate services shall contribute to universal service support mechanisms. The 1996 Act provides that only eligible telecommunications carriers designated by a state shall be eligible to receive specific federal universal service support and that any eligible telecommunications carrier that receives such support shall only use that support to provide, maintain and upgrade facilities and services for universal service in the area for which the support is received. Although the Company anticipates that the FCC's proposed rulemaking and the 1996 Act may result in a reduction of its federal support revenues, 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. Some of the Company's telephone subsidiaries operate in states where traditional cost recovery mechanisms, including rate structures, are under evaluation or have been modified. There can be no assurance that these states will continue to provide for cost recovery at current levels. Certain revenues determined under the FCC's cost separation rules are affected by the number of access lines served by a specific telephone company. During 1995 the customer base of one of the Company's telephone subsidiaries in Michigan increased above 50,000 access lines, which resulted in a decrease in revenues of approximately $700,000. An additional decrease in revenues of that subsidiary of approximately $500,000 is expected in 1996. In addition, in early 1996 another of the Company's telephone subsidiaries reached 50,000 access lines and it is anticipated that revenues for that subsidiary will decrease approximately $1.5 million in 1996 as a result thereof. Most of the Company's LECs concur with the common line and traffic sensitive tariffs filed by the NECA and participate in the access revenue pools administered by the NECA for interstate services. All of the long distance and intrastate network access revenues of the Company's LECs are based on access charges, cost separation studies or special settlement arrangements. See "-Services." Certain long distance carriers continue to request that certain of the Company's LECs reduce access tariffed rates. There is no assurance that these requests will not result in decreased access revenues. Developments Affecting Competition. The communications industry is currently undergoing fundamental changes which may have a significant impact on the future operations and financial performance of telecommunications companies. Primarily as a result of legislative and regulatory initiatives and technological changes, competition has been introduced and encouraged in each sector of the telephone industry, including, most recently, local service. As a result, the number of companies offering competitive services has increased. As indicated above, in February 1996 Congress enacted the 1996 Act, which obligates LECs to permit competitors to interconnect their facilities to the LEC's network and to take various other steps that are designed to lower barriers of entry to competitors. The 1996 Act imposes a general duty to interconnect with other telecommunications carriers and to forego the installation or implementation of network features or functions that do not comply with guidelines and standards established under the 1996 Act. The 1996 Act imposes several duties on a LEC if it receives a specific request from another entity which seeks to connect with or provide services using the LEC's network. These include the duties (i) not to prohibit resale of its service, (ii) to provide number portability, (iii) to provide dialing parity, (iv) to afford access to poles, ducts, conduits, and rights-of-way, and (v) to establish reciprocal compensation arrangements for the transport and termination of traffic. In addition, each incumbent LEC is obligated to (i) negotiate interconnection agreements in good faith, (ii) provide "unbundled" access to all aspects of the LEC's network, (iii) offer resale of its telecommunications services at wholesale rates and (iv) permit competitors to collocate its physical plant on the LEC's property, or provide virtual collocation if physical collocation is not practicable. Under the 1996 Act's rural telephone company exemption, all of the Company's telephone subsidiaries will be exempt from the foregoing itemized obligations of incumbent LECs until such time as the state regulatory commission with jurisdiction over any such company receives notice that a bona fide request has been presented to such company for interconnection, services or network elements and such commission determines that the request is technically feasible, not unduly economically burdensome and is consistent with the universal service provisions contained in the 1996 Act. Facility interconnection charges are required to be based on cost (to be determined without a rate-of-return or other rate-based proceeding) and may include a reasonable profit. The 1996 Act provides that each LEC, to the extent that it provides wireline services, shall have a statutory duty to provide equal access and nondiscrimination to interexchange carriers and information service providers. The 1996 Act requires the FCC to adopt regulations to implement the provisions contained therein. Management believes that the 1996 Act will ultimately increase competition in its franchised telephone service areas, although the form and degree of competition cannot be ascertained until such time as the FCC (and, in certain instances, state regulatory commissions) adopts implementing regulations. Of the 14 states in which the Company provides telephone services, most (including Wisconsin, Louisiana, Ohio and Michigan) have taken legislative or regulatory steps to introduce competition into the local exchange business. Largely as a result thereof, several well-established interexchange carriers and cable television companies have accelerated their development of networks and facilities designed to provide local exchange services, principally in larger cities. A cable company has requested authorization to provide local exchange service in a portion of the Company's franchised service area in Ohio, and it is anticipated that similar action may be taken by others in the Company's franchised service areas. States can, if they so desire, introduce more competition than is authorized under the 1996 Act. Competition from competitive access providers and others has increased and is expected to continue to increase. Competitive access providers, which originally were formed in the 1980's to provide redundancy services, now provide access competition with LECs in most larger urban areas, principally by targeting large business customers. With the passage of the 1996 Act, competitive access providers are expected to be active competitors to provide local telephone service. Although there has been activity by competitive access providers in certain of the Company's operating areas, such activity has thus far not significantly affected the Company. The Company expects to increasingly face competition from competitive access providers in its operating areas located near larger urban areas and may face similar competition in its other operating areas. In addition to receiving services directly from competitive access providers, interexchange carriers and other users of toll service may seek other means to bypass LECs' switching services and local distribution facilities, particularly if services are not strategically priced. There are several ways which users of toll service may bypass the Company's switching services. First, users may construct, modify or lease facilities to transmit their traffic directly to an interexchange carrier. Cable television companies, in particular, may be able to modify their networks to partially or completely bypass the Company's local network. Also, 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 may choose to use mobile communications services or, in the future, companies providing competitive local exchange services, to bypass LECs' switching services. Within the past few years, each of the three largest interexchange carriers in the United States has acquired or sought to acquire interests in mobile communications companies, presumably in part to obtain bypass capabilities. Although certain of the Company's telephone subsidiaries have experienced a loss of traffic to such bypass, the Company believes that the impact of such loss on revenues has not been significant. The Company and the LEC industry are seeking to address bypass principally by adopting flexible pricing of access services where appropriate and to the extent permitted by regulatory agencies. No assurance can be given as to the ultimate outcome of these efforts. Currently, cellular communications services complement traditional LEC services. However, as the mobile communications industry continues to mature, the Company anticipates that existing and emerging mobile communications technologies will increasingly compete with traditional LEC services. Technological and regulatory developments in cellular telephone, personal communications services, digital microwave, coaxial cable, fiber optics and other wired and wireless technologies are expected to further permit the development of alternatives to traditional landline services. For further information on certain of these developments, see "Mobile Communications Operations - Regulation and Competition." In connection with the well-publicized convergence of telecommunications, cable, video, computer and entertainment businesses, several large companies have announced plans to offer products that would significantly enhance current communications and data transmission services and, in some instances, introduce new two-way video, entertainment, data, consumer and other multimedia services. Other companies with wireline experience (including electric utilities) are expected to explore opportunities in this market, along with wireless companies and other emerging technology companies. For information on the effects of these developments on the Company's cellular operations, see "Mobile Communications Operations - Regulation and Competition." To the extent that the telephone industry increasingly experiences competition, the size and resources of each respective competitor may increasingly influence its prospects. Many companies currently providing or planning to provide competitive telecommunication services have substantially greater assets and resources than the Company, and several are not subject to the same regulatory constraints as the Company. Moreover, several of these companies have completed business combinations or formed joint ventures or alliances to better prepare themselves for competition. The Company anticipates that the traditional operations of LECs will be increasingly impacted by continued technological developments as well as legislative and regulatory initiatives affecting the ability of LECs to provide new services and the capability of cable television companies, interexchange carriers, competitive access providers and others to provide competitive LEC services. The Company intends to actively monitor these developments, to observe the effect of emerging competitive trends in initial competitive markets (which are expected to be large urban areas) and to continue to evaluate new business opportunities that may arise out of future technological, legislative and regulatory developments. Although competition relating to services traditionally provided solely by LECs is expected to initially affect large urban areas to a greater extent than rural, suburban and small urban areas such as those in which the Company operates, there is no assurance that these developments will not have an adverse effect on the Company in the future. MOBILE COMMUNICATIONS OPERATIONS According to data derived from published sources, at September 30, 1995 the Company was the fifteenth largest cellular telephone company in the United States based on the Company's owned pops. The number of pops owned by a cellular operator does not represent the number of users of cellular service and is not necessarily indicative of the number of potential subscribers. Rather, this term is frequently used as a basis for comparing the size of cellular system operators. At December 31, 1995, the Company owned approximately 7.6 million pops, of which 72% were applicable to MSAs and 28% were RSA pops. Cellular Industry The cellular telephone industry has been in existence for just over ten years in the United States. Although the industry is relatively new, it has grown significantly during this period and cellular service is now available in substantially all areas of the United States. According to the Cellular Telecommunications Industry Association, in June 1995 there were estimated to be over 28 million cellular customers across the United States. Cellular mobile telephone service is capable of high-quality, high-capacity communications to and from vehicle-mounted and hand-held radio telephones. Cellular systems, if properly designed and equipped, are capable of handling thousands of calls at any given time and are capable of providing service to tens of thousands of subscribers in a market. In a cellular telephone system, the licensed service area is subdivided into geographic areas, or cells. Each cell has its own transmitter and receiver that communicates by radio signal with cellular telephones located within the cell. Each cell is connected by a telephone circuit or microwave to a Mobile Telephone Switching Office ("MTSO"), which in turn is connected to the worldwide telephone network. Communications within a cellular system are controlled by the MTSO through a transfer process as a cellular telephone user moves from one cell to another. In this process, when the signal strength of a call declines to a predetermined level, the MTSO determines if the signal strength from an adjacent cell is greater and, if so, transfers the call to the adjacent cell. Software which facilitates the transfer between adjacent cells of different cellular systems using equipment of different manufacturers has been implemented by the Company. Cellular telephone systems have high subscriber capacity because of the substantial frequency spectrum allocated to these systems by the FCC and because frequencies can be reused throughout the system. Frequency reuse is possible because the transmission power of cell site equipment and mobile units is relatively low. Therefore, signals on the same channel will not interfere with each other if they are transmitted in cells that are sufficiently far apart. Reuse multiplies the capacity of channels available to the system operator and thereby increases the telephone calling capacity. Until recently, substantially all radio transmissions of cellular systems were conducted on an analog basis. Technological developments involving the application of digital radio technology offer certain advantages over analog technologies, including expanding the capacity of mobile communications systems, improving voice clarity, permitting the introduction of new services, and making such systems more private. Providers of certain services competitive with cellular are currently incorporating digital technology into their operations, and are expected to continue to do so in the future. In recent years certain cellular carriers have begun to install digital cellular voice transmission facilities in certain larger markets. See "-Regulation and Competition-Developments Affecting Mobile Communications Competition." Construction and Maintenance The construction and maintenance of cellular systems is capital intensive. Although all of the Company's MSA and RSA systems are operational, the Company has continued to add cell sites to increase coverage, provide additional capacity and improve the quality of these systems. In 1995 the Company completed construction of 41 cell sites in markets operated by the Company. During the last few years the Company upgraded certain portions of its cellular systems to be capable of providing digital service in the future; the Company currently plans to implement digital service in certain markets during 1996 using the TDMA digital standard. The Company will continue to monitor the development and implementation of this technology to determine when it will become beneficial for the Company to install digital voice transmission facilities in other markets. See "-Regulation and Competition-Developments Affecting Mobile Communications Competition." Total capital expenditures related to majority-owned cellular systems operated by the Company were approximately $42 million in 1995 and are anticipated to be approximately $61 million in 1996. 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 51% of the Company's pops in markets operated by the Company are in a single, contiguous cluster of eight MSAs and seven RSAs in Michigan; another 19% are in a cluster of five MSAs and seven RSAs in northern and central Louisiana, southern Arkansas and eastern Texas. See "-The Company's Cellular Interests." Another component of the Company's strategy for cellular operations includes capturing revenues from roaming service. Roaming service revenues are derived from calls made in one cellular service area by subscribers from other service areas. Roaming service is made possible by technical standards requiring that cellular telephones be functionally compatible with the cellular systems in all United States market areas. The Company charges premium rates (compared to rates charged to the Company's customers) for roaming service provided to most non-Company customers. The Company's Michigan cellular properties include a significant portion of the interstate highway corridor between Chicago and Detroit; its Louisiana properties include an east-west interstate highway and a north-south interstate highway which intersect in its Louisiana cellular service area; and its Mississippi properties include two east-west interstate highways, one of which intersects with a north-south interstate highway in Jackson, Mississippi. Marketing The Company markets its cellular services through several distribution channels, including independent agents, its direct sales force and retail outlets owned by the Company and others. The Company's cellular sales force consists of almost 300 independent agents, which generate a significant majority of the Company's new subscribers, and over 200 sales employees. Each sales employee and independent agent solicits cellular customers exclusively for the Company. Company sales employees are compensated by salary and commission and independent sales agents are paid commissions. The Company advertises its services through various means, including direct mail, billboard, magazine, radio, television and newspaper advertisements. The sales and marketing costs of obtaining new subscribers are substantial. The Company not only has to pay for advertising, but also incurs a direct expense for 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. Although the Company has continued to lower the cost of acquisition per subscriber, it remains one of the largest expenses in conducting the Company's cellular operations. During 1994 AT&T Corp. completed its acquisition of McCaw Cellular Communications, Inc., the largest cellular provider in the United States, and has begun to market McCaw's service under the AT&T brand name. The Company competes with AT&T in four of the MSAs it operates and several of its operated RSAs. Services, Customers and System Usage There are a number of different types of cellular telephones, all of which are currently compatible with cellular systems nationwide. The Company sells a full range of vehicle-mounted, transportable, and hand-held portable cellular telephones. Features offered in the cellular telephones sold by the Company include hands-free calling, repeat dialing, horn alert and others. The Company charges its subscribers for access to its systems, for minutes of use and for enhanced services, such as voice mail. A subscriber may purchase certain of these services separately or may purchase rate plans which bundle these services in different ways and are designed to fit different calling patterns. While the Company historically has typically charged its customers separately for custom-calling features, air time in excess of the packaged amount, and toll calls, recently it has begun to offer plans which include features such as unlimited toll calls and unlimited weekend calling in certain calling areas. Custom-calling features provided by the Company include call-forwarding, call-waiting, three-way calling and no-answer transfer. The Company offers voice message service in many of its markets. This service, which functions like a sophisticated answering machine, allows customers to receive messages from callers when they are not available to take calls. Cellular customers come from a wide range of occupations. They typically include a large proportion of individuals who work outside of their office, such as employees in the construction, real estate, wholesale and retail distribution businesses, and professionals. More customers are selecting portable and other transportable cellular telephones as these units become more compact and fully featured, as well as more attractively priced. It is anticipated that average revenue per customer may continue to decline (i) as market penetration increases and additional lower usage customers are activated and (ii) as competitive pressures intensify and place additional pressure on rates. See "-Regulation and Competition." Most cellular systems allow a customer to place or receive a call in a cellular service area away from the customer's home market area. The Company has entered into "roaming agreements" with operators of other cellular systems covering virtually all markets in the United States; such agreements offer the Company's customers the opportunity to roam in these markets. Also, a customer of a participating non-Company system traveling in a market operated by the Company where this arrangement is in effect is able to automatically make calls on the Company's system. The charge to a non-Company customer for this service is typically at premium rates, and is billed by the Company to the customer's home system, which then bills the customer. Occasionally, the Company will enter into reciprocal agreements with other cellular carriers to settle roaming usage at a rate different from such premium rates. In some instances, based on competitive factors and financial considerations, the Company charges a lower amount to its customers than the amount actually charged by the servicing cellular carrier for roaming. The Company anticipates that competitive factors and industry consolidation may place further pressure on charging premium roaming rates. For additional information on roaming revenue, see "-Strategy." Roamer fraud remains a cellular industry problem. Roamer fraud occurs when cellular telephone equipment is programmed to conceal the true identity and location of the user. While the Company and the industry have implemented extensive fraud control processes, they have not been able to eliminate roamer fraud. During recent years, the Company's cellular subsidiaries experienced strong subscriber growth in the fourth quarter, primarily due to increased holiday season sales. According to the Cellular Telecommunications Industry Association, industry-wide cellular sales have been seasonally strong in the fourth calendar quarter for the past several years. The following table summarizes, among other things, certain information about the Company's customers and market penetration: <TABLE> <CAPTION> Year Ended or At December 31, -------------------------------------------------------------------------------------------------------- 1995 1994 1993 -------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> Majority-owned and operated MSA and RSA systems (Note 1): Cellular systems operated 33 31 26 Total population of systems operated (Note 2) 6,877,598 6,359,699 5,015,463 Customers (Note 3): At beginning of period 211,710 116,484 73,084 Additions 139,836 110,636 62,564 Net acquisitions/dispositions 8,699 30,743 - Disconnects 70,170 46,153 19,164 At end of period 290,075 211,710 116,484 Market penetration at end of period (Note 4) 4.22% 3.33 2.32 Churn rate (Note 5) 2.39% 2.29 1.75 Average monthly cellular service revenue per customer $ 66 69 71 Construction expenditures (in thousands) $ 41,990 39,937 56,070 All operated MSA and RSA systems (Note 6): Cellular systems operated 37 36 31 Total population of systems operated (Note 2) 7,721,569 7,445,571 6,084,794 Customers at end of period (Note 7) 313,430 227,140 124,908 Market penetration at end of period (Note 8) 4.06% 3.05 2.05 Notes: 1. Represents the number of systems in which the Company owned at least a 50% interest. The revenues and expenses of these cellular markets, all of which are operated by the Company, are included in the Company's consolidated operating revenues and operating expenses. 2. Based on independent third-party population estimates for each respective year. 3. Represents the approximate number of revenue-generating cellular telephones served by the cellular systems referred to in note 1. 4. Computed by dividing the number of customers at the end of the period by the total population of systems referred to in note 1. 5. Represents the average percentage of customers that disconnect on a monthly basis. 6. Represents the total number of systems that the Company operated, including systems in which it does not own a majority interest. 7. Represents the approximate number of revenue-generating cellular telephones served by the cellular systems referred to in note 6. 8. Computed by dividing the number of customers at the end of the period by the total population of systems referred to in note 6. </TABLE> 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, 1995: <TABLE> <CAPTION> The Other 1995 Company's cellular population Ownership pops at operator (Note 1) percentage December 31, 1995 (Note 2) - ------------------------------------------------------------------------------------------ <S> <C> <C> <C> <C> Majority-owned and operated MSAs Grand Rapids, MI 734,501 97.00% 712,466 AirTouch Lansing, MI 498,597 97.00 483,639 AirTouch Saginaw, MI 402,929 91.70 369,486 AirTouch Kalamazoo, MI 305,095 97.00 295,942 Centennial Battle Creek, MI 193,878 97.00 188,062 Centennial Muskegon, MI 187,884 97.00 182,247 AirTouch Benton Harbor, MI 161,966 97.00 157,107 Masters Cellular Jackson, MI 153,977 97.00 149,358 Centennial Shreveport, LA 379,525 62.00 235,306 AT&T Alexandria, LA 144,396 100.00 144,396 Centennial Monroe, LA 147,395 62.00 91,385 AT&T Jackson, MS (Note 4) 416,071 87.33 363,354 MCTA Biloxi-Gulfport, MS (Note 4) 229,730 92.83 213,249 Cellular South Pascagoula, MS (Note 4) 126,963 85.90 109,065 Cellular South LaCrosse, WI 101,785 95.00 96,696 U. S. Cellular Pine Bluff, AR 83,975 100.00 83,975 AT&T McAllen-Edinburg-Mission, TX (Note 4) 475,980 68.33 325,248 SBC Brownsville-Harlingen, TX (Note 4) 306,979 77.81 238,872 SBC Texarkana, AR/TX 136,879 89.00 121,822 AT&T - -------------------------------------------------------------------------- 5,188,505 4,561,675 - -------------------------------------------------------------------------- Minority-owned MSAs Flint, MI 506,318 3.20% 16,192 Note 3 Detroit, MI 4,602,090 3.20 147,175 Note 3 Appleton/Oshkosh/Neenah, WI 475,651 10.83 51,513 Note 3 Little Rock, AR 543,773 36.00 195,758 Note 3 Lafayette, LA 256,742 49.00 125,804 Note 3 Austin, TX 919,978 35.00 321,992 Note 3 Dallas-Ft. Worth, TX 4,344,179 .50 21,721 Note 3 Sherman-Denison, TX 97,919 .50 490 Note 3 - -------------------------------------------------------------------------- 11,746,650 880,645 - -------------------------------------------------------------------------- Total MSAs 16,935,155 5,442,320 - -------------------------------------------------------------------------- Operated RSAs Arkansas 2 82,860 82.00% 67,945 AT&T Arkansas 3 102,706 82.00 84,219 AT&T Arkansas 11 67,360 89.00 59,950 AT&T Arkansas 12 188,542 80.00 150,834 AT&T Louisiana 1 114,680 62.00 71,102 Cellular One Louisiana 2 116,255 62.00 72,078 AT&T/Centennial Louisiana 3 (B2) 95,585 62.00 59,263 AT&T/Centennial Louisiana 4 73,168 100.00 73,168 Centennial Michigan 3 156,490 38.76 60,660 Unitel Michigan 4 131,069 100.00 131,069 RFB Michigan 5 156,029 38.76 60,481 Unitel Michigan 6 135,706 98.00 132,992 Centennial Michigan 7 238,595 41.78 99,697 Centennial Michigan 8 98,016 97.00 95,076 Allegan Cellular Michigan 9 292,857 43.38 127,041 Centennial Mississippi 2 (Note 4) 242,752 100.00 242,752 Bell South Mobility Mississippi 6 (Note 4) 182,638 100.00 182,638 Cellular South Texas 7 (B6) 57,756 89.00 51,403 AT&T - -------------------------------------------------------------------------- 2,533,064 1,822,368 - -------------------------------------------------------------------------- Non-operated RSAs Arizona 2 243,529 21.30% 51,863 Note 3 Michigan 10 135,023 26.00 35,106 Note 3 Minnesota 11 206,081 13.01 26,807 Note 3 New Mexico 4W 133,708 35.71 47,753 Note 3 Texas 16 319,976 9.60 30,718 Note 3 Wisconsin 1 109,248 8.44 9,222 Note 3 Wisconsin 2 84,925 12.81 10,879 Note 3 Wisconsin 3 139,189 14.29 19,884 Note 3 Wisconsin 6 114,709 28.57 32,774 Note 3 Wisconsin 8 232,864 4.00 9,315 Note 3 Wisconsin 10 128,751 15.00 19,313 Note 3 - -------------------------------------------------------------------------- 1,848,003 293,634 - -------------------------------------------------------------------------- Total RSAs 4,381,067 2,116,002 - -------------------------------------------------------------------------- 21,316,222 7,558,322 ========================================================================== Notes: 1. Based on 1995 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. </TABLE> Operations A substantial number of the cellular systems in MSAs operated by the Company are owned by limited partnerships in which the Company is a general partner ("MSA Partnerships"). Most of these partnerships are governed by partnership agreements with similar terms, including, among other things, customary provisions concerning capital contributions, sharing of profits and losses, and dissolution and termination of the partnership. Most of these partnership agreements vest complete operational control of the partnership with the general partner. The general partner typically has the power to manage, supervise and conduct the affairs of the partnership, make all decisions appropriate in connection with the business purposes of the partnership, and incur obligations and execute agreements on behalf of the partnership. The general partner also may make decisions regarding the time and amount of cash contributions and distributions, and the nature, timing and extent of construction, without the consent of the other partners. The Company owns more than 50% of all of the MSA Partnerships. A substantial number of the cellular systems in RSAs operated by the Company are also owned by limited or general partnerships in which the Company is either the general or managing partner (the "RSA Partnerships"). These partnerships are governed by partnership agreements with varying terms and provisions. In many of these partnerships, the noncontrolling partners have the right to vote on major issues such as the annual budget and system design. In a few of these partnerships, the Company's management position is for a limited term (similar to a management contract) and the other partners in the partnership have the right to change managers, with or without cause. The Company owns less than 50% of some of the RSA Partnerships. The partnership agreements for both the MSA Partnerships and RSA Partnerships generally contain provisions granting all partners a right of first refusal in the event a partner desires to transfer a partnership interest. This restriction on transfer can make these partnership interests more difficult to sell to a third party. Revenue The following table reflects the major revenue categories for the Company's mobile communications operations as a percentage of mobile communications operating revenues in 1995, 1994 and 1993. 1995 1994 1993 ---------------------------------- Cellular access fees, toll revenues and equipment sales 82.3% 82.0 80.5 Cellular roaming 17.7 16.1 14.5 Paging services (Note) - 1.9 5.0 ---------------------------------- 100.0% 100.0 100.0 ================================== Note: The Company's paging operations were sold in October 1994. For further information on these revenue categories, see "-Services, Customers and System Usage." Regulation And Competition As discussed below, the FCC and various state public utility commissions regulate, among other things, the licensing, construction, operation, interconnection arrangements, sale and acquisition of cellular telephone systems. Cellular Licensing Process. During the 1980's and early 1990's, the FCC awarded two licenses to provide cellular service in each market. Each licensee is required to provide service to a designated portion of the area or population in its licensed area as a condition to maintaining that license. Initially, one license was reserved for companies offering local telephone service in the market (the wireline carrier) and one license was available for firms unaffiliated with the local telephone company (the non-wireline carrier). Since mid-1986, the FCC has permitted telephone companies or their affiliates to acquire control of non-wireline licenses in markets in which they do not hold interests in the wireline license. The completion of acquisitions involving the transfer of control of a cellular system requires prior FCC approval and, in certain cases, receipt of other federal and state regulatory approvals. Acquisitions of minority interests generally do not require FCC approval. Whenever FCC approval is required, any interested party may file a petition to dismiss or deny the application for approval of the proposed transfer. Initial operating licenses were granted for ten-year periods and are renewable upon application to the FCC for periods of ten years. Licenses may be revoked and license renewal applications denied for cause. There may be competition for licenses upon the expiration of the initial ten-year terms and there is no assurance that any license will be renewed, although the FCC has issued a decision that grants a renewal expectancy during the license renewal period to incumbent licensees that substantially comply with the terms and conditions of their cellular authorizations and the FCC's regulations. The licenses for the MSA markets operated by the Company were initially granted between 1984 and 1987, and licenses for operated RSAs were initially granted between 1989 and 1991. The Company intends to file renewal applications for its licenses which will otherwise expire in 1996. Five years after initial operating licenses are granted, unserved areas within markets previously granted to licensees may be applied for by any qualified party. The FCC has rules that govern the procedures for filing and granting such applications and has established requirements for constructing and operating systems in such areas. The Company has not lost, and does not expect to lose, any significant market areas as a result of not providing service to such areas. In addition to regulation by the FCC, cellular systems are subject to certain Federal Aviation Administration tower height regulations concerning the siting and construction of cellular transmitter towers and antennas. Cellular operators are also subject to state and local regulation in some instances. Although the FCC has pre-empted the states from exercising jurisdiction in the areas of licensing, technical standards and market structure, certain states require cellular operators to be certified. In addition, some state authorities regulate certain aspects of a cellular operator's business, including certain aspects of pricing, the resale of long distance service to its customers, the technical arrangements and charges for interconnection with the landline network, and the transfer of interests in cellular systems. The siting and construction of the cellular facilities may also be subject to state or local zoning, land use and other local regulations. Competition between cellular providers in each market is conducted principally on the basis of services and enhancements offered, the technical quality and coverage of the system, quality and responsiveness of customer service, and price. Competition may be intense. For a listing of the Company's competitors in cellular markets operated by the Company, see "- The Company's Cellular Interests." Under applicable law, the Company is required to permit the reselling of its services. In certain larger markets and in certain market segments, competition from resellers may be significant. There is also substantial competition for agents. Certain of the Company's competitors have substantially greater assets and resources than the Company. Developments Affecting Mobile Communications Competition. Continued and rapid technological advances in the communications field, coupled with legislative and regulatory uncertainty, make it impossible to (i) predict the extent of future competition to cellular systems, (ii) determine which emerging technologies pose the most viable alternatives to the Company's cellular operations, or (iii) list each development that may ultimately impact the Company's cellular operations. No assurance can be given that current or future technological advances, or legislative or regulatory changes, will not impact the Company's cellular operations. Several recent FCC initiatives have resulted in the allocation of additional radio spectrum or the issuance of experimental licenses for emerging mobile communications technologies that will or may be competitive with the Company's cellular and telephone operations, including personal communication services ("PCS"). Although there is no universally recognized definition of PCS, the term is generally used to refer to wireless services to be provided by licensees operating in the 1850 MHz to 1990 MHz radio frequency band using microcells and high-capacity digital technology. When offered commercially, PCS technology currently under development may permit PCS operators to offer wireless data, image and multimedia services. The extent to which PCS will offer services that are complementary or competitive with cellular services is uncertain, and is expected to be influenced by continuing developments in PCS and cellular technologies and by FCC regulation. The FCC has adopted rules to auction up to six PCS licenses per market. Under these rules, two 30 MHz frequency blocks have been awarded for each of the 51 Rand McNally Major Trading Areas ("MTAs"), while one 30 MHz and three 10 MHz frequency blocks will be awarded for each of the 493 Rand McNally Basic Trading Areas ("BTAs"). Subject to certain exceptions, the Company will be permitted to freely pursue PCS licenses outside its cellular markets, but will be limited to acquiring only one 10 MHz block in licensed areas where it controls more than a 20% interest in a cellular licensee and serves more than 10% of the population within the PCS licensed area. The Company did not participate in the FCC's auction of the MTA licenses. During 1995 the Company invested $20 million in exchange for a minority equity interest in an entity formed for the purpose of participating in the FCC's current auction, which began in December 1995, of the 30 MHz PCS license for each BTA. The FCC anticipates auctioning the final BTA licenses later in 1996. PCS service is commercially available in Washington D.C. and Baltimore and is expected to be commercially available in certain other areas in 1996. In addition to PCS, users and potential users of cellular systems may find their communication needs satisfied by other current and developing technologies, several of which may enjoy potential operational and service advantages through their use of digital technology. The FCC previously authorized the licensees of certain specialized mobile radio service ("SMR") systems (which historically have generally been used by taxicabs and tow truck operators) to configure their systems so as to operate in a manner similar to cellular systems. The Company believes that SMR systems are operating in a majority of its cellular markets. Certain well-established SMR providers have announced their intention to create a nationwide digital mobile communications system to compete with cellular systems. Other similar communication services which have the technical capability to handle mobile telephone calls may provide competition in certain markets, although these services currently lack the subscriber capacity of cellular systems. One-way paging or beeper services that feature voice message and data display as well as tones may be adequate for potential subscribers who do not need to communicate with the caller. Other two-way mobile services may also be competitive with the Company's services, including two-way paging. Mobile satellite systems, in which transmissions are between mobile units and satellites, are currently in operation. No assurance can be given that such systems will not ultimately be successful in obtaining market share from cellular systems which communicate directly to land-based stations. However, the Company has entered into an agreement with a satellite system provider whereby the satellite system will supplement the Company's cellular system in certain areas. As described further under "Telephone Operations - Regulation and Competition," in connection with the well-publicized convergence of telecommunications, cable, video, computer and entertainment businesses, several large companies have recently announced plans to offer products that would significantly enhance current communications and data transmissions services and, in some instances, introduce new services. Although much of the resulting competition is expected to center on wireline services, it is anticipated that these developments may also increase competition in the mobile communications industry. Several companies are currently developing and marketing small hand-held devices that provide digital wireless data transmission services that compete with similar analog services currently being provided by cellular companies. Recently, several large cellular providers have merged with other companies or formed joint ventures. The resulting entities have substantially greater assets and resources than the Company. Several of these joint ventures pooled their resources to purchase PCS licenses awarded in the MTA auctions which were completed in 1995 and to develop the associated markets. For more information, see "-Marketing." Although it is uncertain how PCS, SMR, mobile satellites and other emerging technologies will ultimately affect the Company, they are not anticipated to be significant sources of competition in the Company's markets in the near term. Moreover, management believes that equipping its current cellular networks with digital enhancements and applying new microcellular technologies should permit its cellular systems to provide services comparable with the emerging technologies described above, although no assurances can be given that this will happen or that future technological advances or legislative or regulatory changes will not create additional sources of competition. Certain Considerations Regarding Cellular Telephone Operations The cellular industry has a relatively limited operating history and there continues to be uncertainty regarding its future. Among other factors, there is uncertainty regarding (i) the continued growth in the number of customers, (ii) the usage and pricing of cellular services, particularly as market penetration increases and lower-usage customers subscribe for service, (iii) the number of customers who will terminate service each month, and (iv) the impact of changes in technology, regulation, legislation and competition, any of which could have a material adverse effect on the Company. See "- Regulation and Competition." The market value of cellular interests is frequently determined on the basis of the number of pops owned by a cellular provider. The population of a particular cellular market, however, does not necessarily bear a direct relationship to the number of subscribers or the revenues that may be realized from the operation of the related cellular system. The future market value of the Company's cellular interests will depend on, among other things, the success of its cellular operations. OTHER OPERATIONS The Company also provides long distance, operator and interactive services in certain local and regional markets, as well as certain printing and related services, and has recently entered the competitive access business. The results of these operations, which accounted for 4.4% and 1.2%, respectively, of the Company's consolidated revenues and operating income during 1995, are reflected for financial reporting purposes in the "Other operations" section in operating income. Long Distance. At December 31, 1995, the Company provided long distance services in certain of its local exchange markets to nearly 47,000 customers, which represented a 69% increase from the number of customers served as of January 1, 1995. In January 1996 the Company began marketing long distance service in all of its equal access telephone operating areas and, during January 1996 and February 1996, added 29,000 long distance 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 aggressively expand its long distance business, principally through reselling arrangements. Competitive access. The Company's competitive access subsidiary has constructed an 86-mile fiber optic network which allows the Company to offer certain competitive access services in Fort Worth and Arlington, Texas, along with a portion of downtown Dallas. The subsidiary, which has also obtained a franchise to provide services in Austin, Texas and is currently constructing its network in the Austin market, provides enhanced data transmission services, transport to local area network users, and central office interconnection, primarily for large business customers. The subsidiary also provides transport for origination and termination services for long distance companies. The Company plans to continue to pursue the development of its competitive access business in Texas and expects to incur operating losses in such business during the next few years. Other. The Company provides 0+ and 0- operator services for retail and wholesale markets. The retail market consists primarily of the hospitality and payphone industries. The wholesale market consists of other independent telephone companies and interexchange carriers. The Company has a subsidiary which provides audiotext services, fax-on-demand services, and interactive marketing surveys and research. The advertising and consumer information provided through the audiotext services is supplied by the businesses that advertise. The Company has another subsidiary that provides printing, database management and direct mail services which, in conjunction with the subsidiary that provides marketing surveys and research, can provide a complete market research package to customers. The Company has signed a preliminary agreement with another company providing complementary services, pursuant to which the Company would combine most of the operations of these two subsidiaries with the operations of the other company in exchange for an 80% equity interest in the newly created company. Certain service subsidiaries of the company provide installation and maintenance services, materials and supplies, and managerial, technical and accounting services to the telephone and mobile communications operating subsidiaries. In addition, Century provides and bills management services to subsidiaries and in certain instances makes interest bearing advances to finance construction of plant and purchases of equipment. These transactions are recorded by the Company's regulated telephone subsidiaries at their cost to the extent permitted by regulatory authorities. Intercompany profit on transactions with regulated affiliates is limited to a reasonable return on investment and has not been eliminated in connection with consolidating the results of operations of Century and its subsidiaries. Such intercompany profit is reflected in the "Other operations" section in operating income. 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 1995 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, 5, 11, 14 and 16 of Notes to Consolidated Financial Statements set forth in Item 8 elsewhere herein. Item 2. Properties. The Company's properties consist principally of (i) telephone lines, central office equipment, telephone instruments and related equipment, and land and building related to telephone operations and (ii) switching and cell site equipment related to cellular telephone operations. As of December 31, 1995, the Company's gross property, plant and equipment of approximately $1.5 billion consisted of the following: Telephone: Cable and wire............................................. 44.1% Central office equipment................................... 23.8 General support............................................ 6.6 Information origination/termination equipment.............. 1.6 Construction in progress................................... 4.0 Other...................................................... .4 ----- 80.5 Mobile Communications............................................ 12.8 Other ........................................................... 6.7 ----- 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. "Construction in progress" includes property of the foregoing categories that has not been placed in service because it is still under construction. Most of the properties of the Company's telephone subsidiaries are subject to mortgages securing the debt of such companies. The Company owns substantially all of the central office buildings, local administrative buildings, warehouses, and storage facilities used in its telephone operations. The Company leases most of the offices used in its cellular operations; certain of its transmitter sites are leased while others are owned by the Company. For further information on the location and type of the Company's properties, see the descriptions of the Company's telephone and mobile communications operations in Item 1. Item 3. Legal Proceedings. From time to time, the Company is involved in litigation incidental to its business, including administrative hearings of state public utility commissions relating primarily to rate making, actions relating to employee claims, occasional grievance hearings before labor regulatory agencies and miscellaneous third party tort actions. Currently, there are no material legal proceedings. Item 4. Submission of Matters to a Vote of Security Holders. Not applicable. Executive Officers of the Registrant Information concerning Executive Officers, set forth at Item 10 in Part III hereof, is incorporated in Part I of this Report by reference. PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters. Century's common stock is listed on the New York Stock Exchange and is traded under the symbol CTL. The following table sets forth the high and low sale prices, along with the quarterly dividends, for each of the quarters indicated: Sale prices ------------------ Dividend per High Low common share ---- --- ------------ 1994: First quarter $ 27-7/8 21-7/8 .08 Second quarter $ 27-5/8 22-5/8 .08 Third quarter $ 30-1/2 25 .08 Fourth quarter $ 32-1/4 27-1/2 .08 1995: First quarter $ 33-1/8 29 .0825 Second quarter $ 31-3/4 27-1/2 .0825 Third quarter $ 32-1/8 27 .0825 Fourth quarter $ 32-1/8 27-1/2 .0825 Common stock dividends during 1994 and 1995 were paid each quarter. As of February 29, 1996, there were approximately 6,900 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, 1995: Selected Income Statement Data <TABLE> <CAPTION> Year ended December 31, ---------------------------------------------------------- 1995 1994 1993 1992 1991 ---------------------------------------------------------- (Dollars, except per share amounts, and shares expressed in thousands) <S> <C> <C> <C> <C> <C> Operating revenues Telephone $ 419,242 391,265 350,330 298,812 236,408 Mobile Communications 197,494 150,802 84,712 62,092 46,731 Other 28,104 22,534 20,633 9,956 8,658 ---------------------------------------------------------- Total operating revenues $ 644,840 564,601 455,675 370,860 291,797 ========================================================== Operating income (loss) Telephone $ 143,527 137,992 114,902 103,672 80,039 Mobile Communications 57,009 31,443 9,906 5,956 (4,952) Other 2,383 3,371 3,201 3,324 1,344 ---------------------------------------------------------- Net operating income $ 202,919 172,806 128,009 112,952 76,431 ========================================================== Income before cumulative effect of changes in accounting principles $ 114,776 100,238 69,004 59,973 37,419 Cumulative effect of changes in accounting principles - - - (15,668) - ---------------------------------------------------------- Net income $ 114,776 100,238 69,004 44,305 37,419 ========================================================== Fully diluted earnings per share before cumulative effect of changes in accounting principles $ 1.95 1.80 1.32 1.22 .79 Cumulative effect of changes in accounting principles - - - (.31) - ---------------------------------------------------------- Fully diluted earnings per share $ 1.95 1.80 1.32 .91 .79 ========================================================== Dividends per common share $ .33 .32 .31 .293 .287 ========================================================== Average fully diluted shares outstanding 59,107 58,135 55,892 48,653 47,432 ========================================================== </TABLE> Selected Balance Sheet Data <TABLE> <CAPTION> December 31, --------------------------------------------------------------- 1995 1994 1993 1992 1991 --------------------------------------------------------------- (Dollars in thousands) <S> <C> <C> <C> <C> <C> Net property, plant and equipment $1,047,808 947,131 827,776 675,878 534,998 Excess cost of net assets acquired, net $ 493,655 441,436 297,158 217,688 114,258 Total assets $1,862,421 1,643,253 1,319,390 1,040,487 764,539 Long-term debt $ 622,904 518,603 364,433 346,944 205,453 Stockholders' equity $ 888,424 650,236 513,768 385,449 319,977 </TABLE> 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, 1995: Year ended December 31, ------------------------------------------------- 1995 1994 1993 1992 1991 ------------------------------------------------- Telephone access lines 480,757 454,963 434,691 397,300 314,819 Cellular units in service in majority-owned markets 290,075 211,710 116,484 73,084 51,083 See Items 1 and 2 in Part I and notes 1, 5 and 14 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 The 1995 net income of Century Telephone Enterprises, Inc. and subsidiaries (the "Company") increased to $114.8 million from $100.2 million during 1994 and $69.0 million during 1993. Fully diluted earnings per share for 1995 increased to $1.95 from $1.80 during 1994 and $1.32 during 1993. The average number of fully diluted shares outstanding increased 1.7% and 4.0% in 1995 and 1994, respectively, as a result of shares issued in connection with acquisitions and the Company's dividend reinvestment, incentive and benefit plans. The Company is a regional diversified telecommunications company that is primarily engaged in providing traditional telephone services and cellular mobile telephone services. The Company's 1995 operating income was $202.9 million, an increase of $30.1 million (17.4%) over 1994 operating income of $172.8 million. During 1995 the operating income of the Company's telephone segment and its mobile communications segment increased $5.5 million (4.0%) and $25.6 million (81.3%), respectively, compared to 1994. The Company's operating income during 1993 was $128.0 million. <TABLE> <CAPTION> Year ended December 31, 1995 1994 1993 - ----------------------------------------------------------------------------------------- (Dollars in thousands, except per share amounts) <S> <C> <C> <C> Operating income Telephone $ 143,527 137,992 114,902 Mobile Communications 57,009 31,443 9,906 Other 2,383 3,371 3,201 - ------------------------------------------------------------------------------------------ 202,919 172,806 128,009 Interest expense (43,615) (42,577) (30,149) Income from unconsolidated cellular entities 20,084 15,698 6,626 Gain on sales of assets 6,782 15,877 1,661 Minority interest (8,084) (3,377) (516) Other income and expense 4,982 3,111 625 Income tax expense (68,292) (61,300) (37,252) - ------------------------------------------------------------------------------------------ Net income $ 114,776 100,238 69,004 ========================================================================================== Fully diluted earnings per share $ 1.95 1.80 1.32 ========================================================================================== </TABLE> The operating income of the telephone segment includes the results of operations of Century Telephone of San Marcos, Inc. ("San Marcos") subsequent to its acquisition in April 1993. See Note 14 of Notes to Consolidated Financial Statements for additional information. The Company's mobile communications operations reflect the operations of the cellular entities in which the Company has a majority interest. For additional information concerning (i) the minority interest owners' share of the income of such entities and (ii) the Company's share of earnings from cellular entities in which it has less than a majority interest (which is not included in the mobile communications segment), see Mobile Communications Operations. The operating income of the mobile communications segment includes the results of operations of Celutel, Inc. ("Celutel") subsequent to its acquisition in February 1994, and the Company's paging operations prior to their sale in October 1994. See Notes 11 and 14 of Notes to Consolidated Financial Statements for additional information. In addition to the San Marcos and Celutel acquisitions, during the three years ended December 31, 1995 the Company has consummated the acquisitions of various, smaller, telephone and cellular operations. Based on its review of publicly available data, the Company believes that it has the second highest ratio of owned cellular pops (the population of licensed cellular telephone markets multiplied by the Company's proportionate equity interests in the licensed operators thereof) to telephone access lines among the 20 largest telephone companies (based on access lines) in the United States. Accordingly, the Company anticipates that its mobile communications operations will continue to increasingly influence the Company's overall operations as the cellular industry continues to grow. Contributions to operating revenues and operating income by the Company's telephone, mobile communications, and other operations for each of the years in the three-year period ended December 31, 1995 were as follows: 1995 1994 1993 - --------------------------------------------------------------------------- Operating revenues Telephone operations 65.0% 69.3 76.9 Mobile Communications operations 30.6% 26.7 18.6 Other operations 4.4% 4.0 4.5 Operating income Telephone operations 70.7% 79.9 89.8 Mobile Communications operations 28.1% 18.2 7.7 Other operations 1.2% 1.9 2.5 - --------------------------------------------------------------------------- TELEPHONE OPERATIONS Year ended December 31, 1995 1994 1993 - -------------------------------------------------------------------------- (Dollars in thousands) Operating revenues Local service $111,629 100,020 88,704 Network access and long distance 258,462 243,759 217,055 Other 49,151 47,486 44,571 - -------------------------------------------------------------------------- 419,242 391,265 350,330 - -------------------------------------------------------------------------- Operating expenses Plant operations 86,789 84,117 80,578 Customer operations 38,768 35,746 32,225 Corporate and other 63,834 60,235 57,450 Depreciation and amortization 86,324 73,175 65,175 - -------------------------------------------------------------------------- 275,715 253,273 235,428 - -------------------------------------------------------------------------- Operating income $143,527 137,992 114,902 ========================================================================== The Company's telephone operations are conducted in rural, suburban and small urban communities in 14 states. Approximately 80% of the Company's telephone access lines are in Wisconsin, Louisiana, Michigan, Ohio and Arkansas. Local Service Revenues Local service revenues are derived from the provision of local exchange telephone services in the Company's franchised service areas. The $11.6 million increase in such revenues in 1995 included $4.5 million due to the increase in the number of customer access lines, $3.0 million from increased rates for basic services and $2.0 million due to acquisitions. Acquisitions contributed $1.2 million to the 1994 increase of $11.3 million; $4.5 million of the 1994 increase was due to the increase in access lines; and $3.8 million was due to increased rates for basic services. The remaining increases in 1995 and 1994 were primarily due to the provision of custom calling features. Internal access line growth during 1995, 1994 and 1993 was 4.4%, 4.1% and 3.6%, respectively. Network Access and Long Distance Revenues Network access and long distance revenues primarily relate to services provided to interexchange carriers (long distance carriers) in connection with the completion of long distance telephone calls. Most of the Company's interstate network access revenues are received through pooling arrangements administered by the National Exchange Carrier Association ("NECA") based on cost separation studies. The NECA receives access charges billed by the Company and other participating local exchange carriers ("LECs") to interstate long distance carriers and other LEC customers for their use of the local exchange network to complete long distance calls. These charges to the long distance carriers and other LEC customers are based on tariffed access rates filed with the Federal Communications Commission ("FCC") by the NECA on behalf of the Company and other participating LECs. Long distance and intrastate network access revenues are based on access rates, cost separation studies or special settlement arrangements with intrastate long distance carriers. Network access and long distance revenues increased $14.7 million (6.0%) in 1995 and $26.7 million (12.3%) in 1994 due to the following factors: <TABLE> <CAPTION> 1995 1994 Increase Increase (decrease) (decrease) - ---------------------------------------------------------------------------------------- (Dollars in thousands) <S> <C> <C> Acquisitions $ 4,821 5,734 Partial recovery of increased operating expenses through revenue pools in which the Company participates with other telephone companies and return on rate base 3,039 8,834 Increased recovery from the FCC mandated Universal Service Fund ("USF") 4,394 8,815 Increased minutes of use 1,440 2,409 Revision of prior year revenue settlement agreements (500) 2,537 Other, net 1,509 (1,625) - --------------------------------------------------------------------------------------- $14,703 26,704 ======================================================================================= </TABLE> The change in other, net in 1995 and 1994 included reductions of $1.7 million and $1.9 million, respectively, in intrastate high-cost assistance revenues as a result of the phase-out of the Wisconsin state support fund; the loss of such revenues was offset by an increase in local rates in the same jurisdictions. Included in other, net in 1995 was approximately $2.5 million of revenue associated with a change in the method used to calculate factors applied in the network access revenue billing process. Included in other, net in 1994 was a reduction of $2.3 million in certain settlements received from a large local exchange operating company by the Company's Louisiana subsidiaries. Other Revenues Other revenues include revenues related to (i) leasing, selling, installing, maintaining and repairing customer premise telecommunications equipment and wiring ("CPE services"), (ii) providing billing and collection services for interexchange carriers, (iii) leasing network facilities and (iv) participating in the publication of local directories. Revenues from CPE services and acquisitions contributed $1.9 million and $606,000, respectively, to the increase in other revenues in 1995. Such increases were partially offset by a decrease in billing and collection revenues of $896,000. Billing and collection revenues are expected to continue to decrease in 1996. The increase in other revenues during 1994 was primarily due to a $1.2 million increase in directory advertising revenues and a $1.1 million increase in billing and collection revenues. Operating Expenses Plant operations expenses during 1995 and 1994 increased $2.7 million (3.2%) and $3.5 million (4.4%), respectively. Operating expenses attributable to acquisitions contributed $1.8 million to the 1995 increase and $2.3 million to the 1994 increase. The remainder of the 1995 increase was due to an increase in general operating expenses. A $1.2 million increase in salaries, wages and benefits during 1994 was partially offset by a $531,000 reduction in postemployment benefit expense. Expenses attributable to acquisitions contributed $2.7 million and $2.1 million, respectively, to the 1995 increase of $6.6 million (6.9%) and the 1994 increase of $6.3 million (7.0%) in customer operations, corporate, and other expenses. Ad valorem taxes increased $1.2 million in 1995 and $1.0 million in 1994 due to the increases in plant in service. During 1995 marketing expenses increased $2.1 million. The remainder of the 1994 increase resulted from increases in other general operating expenses. Depreciation and amortization increased $13.1 million (18.0%) and $8.0 million (12.3%) in 1995 and 1994, respectively. Approximately $1.0 million and $2.4 million of the increases in 1995 and 1994, respectively, were due to acquisitions. Depreciation expense included nonrecurring additional depreciation charges approved by regulators in certain jurisdictions which aggregated $6.5 million in 1995 and $3.3 million in 1993. In addition, the Company obtained higher recurring depreciation rates for certain subsidiaries during 1994 and 1993. The first-year effects of the higher rates were approximately $5.6 million in 1994 and $1.7 million in 1993. The remaining increases in depreciation and amortization were due to higher levels of plant in service. The composite depreciation rate for regulated telephone properties, including the additional depreciation charges, was 7.5% for 1995 and 7.1% for 1994 and 1993. Other For additional information regarding certain matters that have impacted or may impact the Company's telephone operations, see Regulation and Competition. MOBILE COMMUNICATIONS OPERATIONS <TABLE> <CAPTION> Year ended December 31, 1995 1994 1993 - ------------------------------------------------------------------------------------------ (Dollars in thousands) <S> <C> <C> <C> Operating revenues Cellular service $ 191,953 141,325 76,583 Equipment and other 5,541 9,477 8,129 - ------------------------------------------------------------------------------------------ 197,494 150,802 84,712 - ------------------------------------------------------------------------------------------ Operating expenses Cost of sales 10,235 8,978 4,273 Other operating expenses 25,902 22,881 15,408 General, administrative and customer service 39,471 33,171 23,872 Sales and marketing 39,450 33,074 19,894 Depreciation and amortization 25,427 21,255 11,359 - ------------------------------------------------------------------------------------------ 140,485 119,359 74,806 - ------------------------------------------------------------------------------------------ Operating income $ 57,009 31,443 9,906 ========================================================================================== </TABLE> The Company's mobile communications segment reflects 100% of the results of operations of the cellular entities in which the Company has a majority interest. The minority interest owners' share of the income of such entities was $8.1 million, $3.4 million and $516,000 in 1995, 1994 and 1993, respectively, and is reflected as an expense in "Minority interest." The Company's cellular customers are located primarily in Louisiana, Michigan, Mississippi and Texas. The Company's share of earnings from the cellular entities in which it has less than a majority interest (which is not included in the mobile communications segment) is accounted for using the equity method and is reflected in "Income from unconsolidated cellular entities." The Company's share of income from such entities increased to $20.1 million in 1995 from $15.7 million in 1994 and $6.6 million in 1993. Operating Revenues Cellular service revenues include monthly service fees for providing access and airtime to customers, service fees for providing airtime to users roaming through the Company's service areas and toll revenue. Cellular service revenues during 1995 increased to $192.0 million from $141.3 million in 1994 and $76.6 million in 1993. The 1995 and 1994 increases in cellular service revenues were primarily attributable to the significant increases in cellular customers resulting principally from increased demand, acquisitions and expanded areas of service. Cellular units in service in the Company's majority-owned markets increased to 290,075 as of December 31, 1995 from 211,710 as of December 31, 1994 and 116,484 as of December 31, 1993. Included in the 1995 and 1994 increases were 8,931 and 31,155, respectively, of units added through acquisitions. Exclusive of acquisitions, access and usage revenues increased $30.8 million (30.3%) in 1995 and $27.2 million (48.3%) in 1994 and roaming and toll revenues increased $12.9 million (36.0%) and $9.8 million (54.9%) in 1995 and 1994, respectively. Cellular entities acquired in 1995 contributed $4.0 million to cellular service revenues. The Celutel operations increased revenues by $26.3 million in 1994. The average monthly cellular service revenue per customer declined to $66 in 1995 from $69 in 1994 and $71 in 1993. It has been an industry-wide trend that early subscribers have normally been the heaviest users and that a higher percentage of new subscribers tend to be lower usage customers. The average monthly service revenue per customer may further decline (i) as market penetration increases and additional lower usage customers are activated and (ii) as competitive pressures intensify and place additional pressure on rates. The Company will continue to focus on customer service and attempt to stimulate cellular usage by promoting the availability of certain enhanced services and by improving the quality of its service through the construction of additional cell sites and enhancements to its system. Equipment and other revenues included $2.9 million and $4.2 million in 1994 and 1993, respectively, of revenues attributable to the Company's paging operations, which were sold in October 1994. The remainder of equipment and other revenues consisted primarily of cellular equipment sales. Revenues from the sale of cellular phones decreased $1.0 million in 1995 compared to 1994. Although the Company sold more phones in 1995 than in 1994, revenues decreased because the Company has increasingly sold phones below cost, a strategy which is common in the cellular industry. Operating Expenses The increases in cost of sales during 1995 and 1994 resulted from increases in the number of cellular phones sold. Other operating expenses increased $3.0 million (13.2%) in 1995 primarily due to a $1.5 million increase in costs paid to other carriers related to the Company's customers who roam in other carriers' service areas in excess of the amounts the Company bills its customers (such costs are expected to increase as the Company continues to expand its reduced rate calling areas) and a $1.5 million increase in expenses incurred in interconnecting new cell sites. Such increases were partially offset by a $1.0 million decrease in operating expenses due to the sale of the Company's paging operations in 1994. The $7.5 million increase in 1994 in other operating expenses included $5.8 million of expenses of Celutel subsequent to its acquisition in February 1994. The remaining increase in other operating expenses in 1994 was primarily due to interconnecting and operating new cell sites which were built to improve service in several existing markets and to initiate and develop service in several rural markets. The Company operated 277 cell sites at December 31, 1995 in entities in which it had a majority interest, compared to 230 at December 31, 1994 and 158 at December 31, 1993. In 1995 and 1994, 24 cell sites and 29 cell sites, respectively, were added through acquisitions. Most of the $6.3 million (19.0%) increase in general, administrative and customer service expenses in 1995 was related to increased expenses resulting from a larger customer base, such as billing costs ($1.4 million), general office expenses ($1.1 million), uncollectible accounts ($1.2 million) and customer service ($620,000). General, administrative and customer service expenses increased $9.3 million (39.0%) in 1994, $7.4 million of which was due to the Celutel operations. The remaining increase in 1994 was primarily related to the increased number of customers. During 1995 and 1994, sales and marketing expenses increased $6.4 million (19.3%) and $13.2 million (66.3%), respectively, of which $3.8 million in 1995 and $8.2 million in 1994 were due to increases in commissions paid to agents for selling cellular services to new customers. The 1995 increase also included a $1.3 million increase in the costs of sales promotions and a $509,000 increase in advertising. Costs of operating the Company's retail stores, the first of which was opened in late 1994, increased $601,000 in 1995. The remaining increase in 1994 was due to the Celutel operations. Depreciation and amortization increased $4.2 million (19.6%) in 1995 and $9.9 million (87.1%) in 1994 due to increases of $3.7 million and $4.9 million, respectively, applicable to higher levels of cellular plant in service. Approximately $3.8 million of the 1994 increase was due to amortization of goodwill attributable to the acquisition of Celutel. Other For additional information regarding certain matters that have impacted or may impact the Company's mobile communications operations, see Regulation and Competition. OTHER OPERATIONS Other operations includes the results of operations of subsidiaries of the Company which are not included in the telephone or mobile communications segments, including, but not limited to, the Company's competitive access subsidiary and the Company's nonregulated long distance operations. The $988,000 decrease in operating income in 1995 was substantially due to the loss incurred by the Company's competitive access subsidiary in 1995 ($3.6 million) being $1.8 million more than in 1994. The Company expects such loss to be between $6.0 million and $8.0 million in 1996. INTEREST EXPENSE Interest expense increased $1.0 million (2.4%) in 1995 and $12.4 million (41.2%) in 1994. The effect of higher average interest rates increased interest expense $4.0 million in 1995. Such increase was substantially offset by a decrease in interest expense due to a decrease in average debt outstanding. In February 1995 the Company's $115.0 million of 6% convertible debentures were converted into common stock. In November 1995 the Company issued $150.0 million of senior notes under its $400.0 million shelf registration statement filed with the United States Securities and Exchange Commission (the "SEC") in 1994. For additional information, see Liquidity and Capital Resources - Financing Activities and Note 5 of Notes to Consolidated Financial Statements. The increase during 1994 was primarily the result of a 34% increase in average debt outstanding, a substantial amount of which was incurred in connection with the acquisition of Celutel. INCOME FROM UNCONSOLIDATED CELLULAR ENTITIES Earnings from unconsolidated cellular entities, net of the amortization of associated goodwill, increased $4.4 million (27.9%) during 1995 and $9.1 million (136.9%) during 1994. The 1995 increase was net of an $800,000 reduction in such earnings which resulted from a retroactive adjustment related to prior years recorded by the operator of a cellular partnership in which the Company owns less than a majority interest. An increase of $2.9 million in the Company's share of income from the partnership interests acquired in the San Marcos acquisition in April 1993 contributed to the 1994 increase. The remainders of the 1995 and 1994 increases were due to the improvement in profitability of cellular entities in which the Company owns less than a majority interest. GAIN ON SALES OF ASSETS During 1995 the Company sold its ownership interests in certain non-strategic cellular entities which resulted in a pre-tax gain of $5.9 million ($2.0 million after-tax; $.03 per fully diluted share). Sales of other assets during 1995 resulted in a pre-tax gain of $873,000 ($567,000 after-tax; $.01 per fully diluted share). The Company sold the assets comprising a cellular system in a Rural Service Area ("RSA") in Minnesota in 1994 and recognized a pre-tax gain of $14.7 million ($8.5 million after-tax; $.15 per fully diluted share). In addition, the Company sold its paging operations in 1994 which resulted in a pre-tax gain of $1.2 million ($756,000 after-tax; $.01 per fully diluted share). MINORITY INTEREST The increased profitability during 1995 and 1994 of the Company's majority-owned and operated cellular entities resulted in a corresponding increase of $4.7 million and $2.9 million, respectively, in the expense recorded by the Company to reflect the minority interest owners' share of the profits. OTHER INCOME AND EXPENSE Other income and expense during 1995 was $5.0 million compared to $3.1 million during 1994 and $625,000 in 1993. During 1995 and 1994 interest income increased $1.0 million and $1.5 million, respectively, due to interest income earned on a $25.0 million note receivable issued to Century in May 1994. For additional information, see Liquidity and Capital Resources - Investing Activities. INCOME TAX EXPENSE The effective income tax rate was 37.3%, 37.9% and 35.1% in 1995, 1994 and 1993, respectively. The increase in the effective rate in 1994 was primarily the result of (i) amortization of investment tax credits and the regulatory liability relating to income taxes remaining relatively stable while income before taxes increased and (ii) the effect of an increase in the amortization of goodwill which is not tax deductible. ACCOUNTING PRONOUNCEMENTS The Company adopted Statement of Financial Accounting Standards No. 112 ("SFAS 112"), "Employers' Accounting for Postemployment Benefits," in the first quarter of 1994. No cumulative effect of change in accounting principle was required to be recorded upon adoption of SFAS 112. The Company will adopt 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," in 1996. SFAS 121 establishes accounting standards for the impairment of long-lived assets, certain identifiable intangibles, and goodwill related to those assets to be held and used, and for long-lived assets and certain identifiable intangibles to be disposed of. SFAS 121 also requires that a rate-regulated enterprise recognize an impairment for the amount of costs excluded when a regulator excludes all or part of a cost from the enterprise's rate base. The effect of adoption of SFAS 121 by the Company is not expected to materially affect the Company's consolidated financial position or results of operations. The Company will also adopt Statement of Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting for Stock-Based Compensation," in 1996. SFAS 123 establishes financial accounting and reporting standards for stock-based employee compensation plans. The Company currently plans, as allowed by SFAS 123, to continue to measure compensation cost for employee stock compensation plans using the method prescribed by Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and will provide pro forma disclosures in the Notes to the Consolidated Financial Statements as required by SFAS 123. INFLATION The effects of increased costs historically have been mitigated by the ability to recover certain costs applicable to the Company's regulated telephone operations through the rate-making process. As operating expenses in the nonregulated areas increase as a result of inflation, the Company, to the extent permitted by competition, recovers the costs by increasing prices for its services and equipment. While the regulatory process does not consider replacement cost of physical plant, the Company has historically been able to earn a return on the increased cost of its net investment when facilities have been replaced. Possible future regulatory changes may alter the Company's ability to recover increased costs in its regulated operations. For additional information regarding the current regulatory environment, see Regulation and Competition. LIQUIDITY AND CAPITAL RESOURCES Excluding cash used for acquisitions, the Company relies on cash provided by operations to provide a substantial portion of its cash needs. The Company's telephone operations have historically provided a stable source of cash flow which has helped the Company continue its long-term program of capital improvements. Cash provided by the Company's mobile communications operations has increased each year since that segment became cash-flow positive. Operating Activities Net cash provided by operating activities was $215.7 million, $199.8 million and $166.8 million in 1995, 1994 and 1993, respectively. The Company's accompanying consolidated statements of cash flows identifies major differences between net income and net cash provided by operating activities for each of those years. For additional information relating to the telephone operations, mobile communications operations, and other operations of the Company, see Results of Operations. Investing Activities Net cash used in investing activities was $227.8 million, $280.3 million and $248.7 million during 1995, 1994 and 1993, respectively. Capital expenditures for 1995 were $136.0 million for telephone operations, $42.0 million for mobile communications operations and $18.6 million for corporate and other operations. During 1995 the Company invested $20.0 million in exchange for a minority equity interest in an entity formed for the purpose of participating in the FCC's auction, which began in December 1995, of Basic Trading Area Personal Communications Services ("PCS") licenses. Cash used in connection with the February 1994 acquisition of Celutel was $56.0 million. In connection with the corporate restructuring of an unaffiliated local exchange telephone company which has been viewed from time to time as an acquisition candidate, Century loaned the telephone company's holding company $25.0 million in May 1994. Payments for property, plant and equipment during 1994 and 1993 were $200.8 million and $204.2 million, respectively. Financing Activities Net cash provided by financing activities was $13.5 million in 1995. In November 1995 the Company issued $150.0 million of senior notes under its $400.0 million shelf registration statement (see next paragraph and Note 5 of Notes to Consolidated Financial Statements) to take advantage of attractive long-term interest rates. The net proceeds were used to reduce the Company's borrowings under its credit facilities. Net cash provided by financing activities during 1994 and 1993 was $77.8 million and $81.9 million, respectively. During 1994 the Company filed a shelf registration statement with the SEC registering $400.0 million of senior unsecured debt securities under which the Company issued $150.0 million of senior notes in May 1994. See Note 5 of Notes to Consolidated Financial Statements. The proceeds were used to discharge the Company's indebtedness under a $90.0 million bridge loan incurred to fund substantially all of the Company's cash requirements in connection with the acquisition of Celutel in February 1994 and to reduce the Company's short-term bank indebtedness under various floating-rate credit facilities. In connection with the offering, in the second quarter of 1994 Moody's upgraded Century's senior unsecured debt rating to Baa1 and Standard & Poor's affirmed its BBB+ rating. The $158.0 million of notes payable at December 31, 1994 reflected the Company's continued utilization of borrowings under its credit facilities to take advantage of favorable short-term interest rates. Other Budgeted capital expenditures for 1996 total $102 million for telephone operations, $61 million for mobile communications operations and $26 million for corporate and other operations. The Company anticipates that capital expenditures in its telephone operations will continue to include the installation of fiber optic cable and the upgrading of its plant and equipment, including its digital switches, to provide enhanced services. Mobile communications capital expenditures are expected to continue to focus on constructing additional cell sites (which will provide expanded areas where hand-held cellular phones may be used), to enhance the Company's ability to provide digital service in the future and to begin providing digital service in certain markets. Budgeted capital expenditures for other operations for 1996 include $19 million of capital construction costs planned to be expended in the Company's competitive access operations. 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 615,000 shares of Century common stock and 125,000 shares of Century preferred stock remain available for future issuance in connection with acquisitions under an acquisition shelf registration statement. As of December 31, 1995, Century's telephone subsidiaries had available for use $142.6 million of commitments for long-term financing from the Rural Utilities Service and the Company had $108.6 million of undrawn committed bank lines of credit. In addition, approximately $140.0 million of uncommitted credit facilities were available to Century at December 31, 1995. The Company also has access to debt and equity capital markets, including its shelf registration statements mentioned above. The Company has experienced no significant problems in obtaining funds for capital expenditures or other purposes. Common stockholders' equity as a percentage of total capitalization was 57.6% and 48.4% at December 31, 1995 and 1994, respectively. If the 6% convertible debentures which were converted into common stock in 1995 had been converted into common stock at December 31, 1994, common stockholders' equity as a percentage of total capitalization would have been 57.0%. REGULATION AND COMPETITION Most of the Company's telephone operations are regulated extensively by various state regulatory agencies and by the FCC. Primarily as a result of legislative, regulatory and technological changes, competition has been introduced and encouraged in the telephone industry and regulation has decreased; it is anticipated that these trends will continue. While competition is not new to the Company's cellular operations, competition from other providers of mobile communications services is also expected to increase. Events Affecting the Telecommunications Industry The telecommunications industry continues to undergo various fundamental regulatory, competitive and technological changes that make it impossible to determine the form or degree of future regulation and competition affecting the Company's telephone and mobile communications operations. The FCC and a number of state regulatory commissions have begun to reduce the regulatory oversight of LECs. Coincident with this movement toward reduced regulation has been the introduction and encouragement of local exchange competition by, among others, the FCC, various state legislative and regulatory bodies and, most recently, the United States Congress (see next paragraph). These changes have led to the organization or continued growth of various companies providing competitive access and other services that compete with LECs' services. Wireless telephone services are also expected to increasingly compete with LECs. 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 lower barriers of entry to competitors. These include obligating incumbent LECs to (i) negotiate interconnection agreements in good faith, (ii) provide "unbundled" access to all aspects of the LEC's network, (iii) offer resale of its telecommunications services at wholesale rates and (iv) permit competitors to collocate its physical plant on the LEC's property, or provide virtual collocation if physical collocation is not practicable. Under the 1996 Act's rural telephone company exemption, all of the Company's telephone subsidiaries will be exempt from the foregoing itemized obligations of incumbent LECs until such time as the state regulatory commission with jurisdiction over any such company receives notice of a bona fide request for interconnection, services or network elements and such commission determines that the request is technically feasible, not unduly economically burdensome and is consistent with the universal service provisions contained in the 1996 Act. The 1996 Act provides that a federal-state joint board will review existing universal service support mechanisms and recommend changes to the FCC regulations in order that such regulations will be consistent with the universal service principles in the 1996 Act. In addition, the 1996 Act provides that all telecommunications carriers providing interstate services shall contribute to universal service support mechanisms. Management believes that the 1996 Act will ultimately increase competition in its franchised telephone service areas, although the form and degree of competition cannot be ascertained until such time as the FCC (and, in certain instances, state regulatory commissions) adopts implementing regulations. The FCC has allocated additional frequency spectrum for mobile communications technologies that are expected to be competitive with cellular, including PCS (for which the FCC began to auction operating licenses in late 1994) and mobile satellite services. The FCC has also authorized certain specialized mobile radio service licensees to configure their systems so as to operate in a manner similar to cellular systems. In addition, in connection with the well-publicized convergence of telecommunications, cable, video, computer and other technologies, several large companies have announced plans to offer products that would significantly enhance current communications and data transmission services and, in some instances, introduce new two-way video, entertainment, data, consumer and other multimedia services. Competition to provide local exchange and access services is expected to initially affect large urban areas to a greater extent than rural, suburban and small urban areas such as those in which the Company's telephone operations are located. The same expectation applies to emerging competitive wireless technologies and the development of new multimedia services. The Company does not believe such competition is likely to materially affect it in the near term. The Company further believes that it may benefit from having the opportunity to observe the effects of these developments in large urban markets. The Company will continue to monitor the ongoing changes in regulation, competition and technology and consider which developments provide the most favorable opportunities for the Company to pursue. Recent Events Affecting the Company Revenues from the USF increased approximately $5.4 million to $41.7 million during 1995 after increasing $9.7 million during 1994. The 1996 Act provides that a federal-state joint board will review existing universal service support mechanisms and recommend changes to the appropriate FCC regulations; for additional information, see Events Affecting the Telecommunications Industry. Earlier in 1995, the FCC sought public comments on proposals and policy changes relating to certain federal high-cost assistance mechanisms that provide substantial revenues to the Company, including the USF. Although the Company anticipates that it may experience a reduction in its federal support revenues at some point in the future, management believes it is premature to assess or estimate the ultimate impact thereof. There can be no assurance, however, that such impact will not be material. In February 1996 the FCC sought public comments on whether it should initiate a rate of return represcription proceeding for LECs that are subject to rate of return regulation for interstate access revenues. During the last two years, Wisconsin, Louisiana, Ohio, Michigan and certain other states in which the Company operates took legislative and/or regulatory steps to further introduce competition into the LEC business. A cable company has requested authorization to provide local exchange service in a portion of the Company's franchised service area in Ohio, and it is anticipated that similar action may be taken by others in the future in the Company's franchised service areas. During 1995, the Louisiana Public Service Commission ("LPSC") culminated its two-year investigation into the earnings of independent telephone companies in Louisiana by adopting a new regulatory plan for such companies effective July 1, 1995. The plan provides that independent telephone companies in Louisiana will be regulated on an incentive-type rate of return basis in a manner yet to be determined. Under this plan, the Company is required to reduce its intrastate switched access rates over a two-year period to match the rates in effect for BellSouth. The Company's access revenues were reduced approximately $500,000 in 1995 as a result of this regulation and the Company anticipates that this directive will reduce its access revenues by up to $4.2 million annually upon completion of the two year phase-in. The plan also establishes a target rate of return of between 10.75% and 12.75% after giving effect to the access rate reductions described above. Beginning July 1, 1996, companies earning in excess of 12.75% will be required to lower their prospective rate of return to 12.25%, either by further reducing access rates (subject to certain limits) or taking such other actions as may be directed by the LPSC. Although the impact of this directive on the Company cannot be readily determined until the LPSC provides additional guidance on the operation and methodology of the plan, the Company anticipates that the impact of these changes will adversely affect its results of operations and there is no assurance that the effect will not be material. During 1995 certain of the Company's Louisiana telephone subsidiaries, with the LPSC's approval, recorded an aggregate of $6.5 million of nonrecurring additional depreciation charges. The Company anticipates that certain of its Louisiana telephone subsidiaries may continue to take action to reduce earnings levels as a result of this plan. Certain long distance carriers continue to request that the Company reduce intrastate access tariffed rates for certain of its telephone subsidiaries. There is no assurance that these requests will not result in reduced intrastate access revenues in the future. Certain revenues determined under the FCC's cost separation rules are affected by the number of access lines served by a specific telephone company. During 1995 the customer base of one of the Company's telephone subsidiaries in Michigan increased above 50,000 access lines, which resulted in a decrease in revenues of approximately $700,000. An additional decrease in revenues of that subsidiary of approximately $500,000 is expected in 1996. In addition, in early 1996 another of the Company's telephone subsidiaries reached 50,000 access lines and it is anticipated that revenues for that subsidiary will decrease approximately $1.5 million in 1996 as a result thereof. Other Matters The Company's regulated telephone operations are subject to the provisions of Statement of Financial Accounting Standards No. 71 ("SFAS 71"), "Accounting for the Effects of Certain Types of Regulation," under which the Company is required to account for the economic effects of the rate-making process, including the recognition of depreciation of plant and equipment over lives approved by regulators. The ongoing applicability of SFAS 71 to the Company's regulated telephone operations is being monitored due to the changing regulatory, competitive and legislative environments. When the regulated operations of the Company no longer qualify for the application of SFAS 71, the required accounting impact, the amount of which has not been determined, will result in a material, extraordinary, noncash charge against earnings. See Note 12 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 1995 have not been material and the Company currently has no reason to believe that such costs will become material. Item 8. Financial Statements and Supplementary Data Report of Management -------------------- The Shareholders Century Telephone Enterprises, Inc.: Management has prepared and is responsible for the Company's consolidated financial statements. The consolidated financial statements have been prepared in accordance with generally accepted accounting principles and necessarily include amounts determined using our best judgments and estimates with consideration given to materiality. The Company maintains internal control systems and related policies and procedures designed to provide reasonable assurance that the accounting records accurately reflect business transactions and that the transactions are in accordance with management's authorization. The design, monitoring and revision of the systems of internal control involve, among other things, our judgment with respect to the relative cost and expected benefits of specific control measures. Additionally, the Company maintains an internal auditing function which independently evaluates the effectiveness of internal controls, policies and procedures and formally reports on the adequacy and effectiveness thereof. The Company's consolidated financial statements have been audited by KPMG Peat Marwick LLP, independent certified public accountants, who have expressed their opinion with respect to the fairness of the consolidated financial statements. Their audit was conducted in accordance with generally accepted auditing standards, which includes the consideration of the Company's internal controls to the extent necessary to form an independent opinion on the consolidated financial statements prepared by management. The Audit Committee of the Board of Directors is composed of directors who are not officers or employees of the Company. The Committee meets periodically with the independent certified public accountants, internal auditors and management. The Committee considers the audit scope and discusses internal control, financial and reporting matters. Both the independent and internal auditors have free access to the Committee. /s/ R. Stewart Ewing, Jr. R. Stewart Ewing, Jr. Senior Vice President and Chief Financial Officer Independent Auditors' Report ---------------------------- The Board of Directors Century Telephone Enterprises, Inc.: We have audited the consolidated financial statements of Century Telephone Enterprises, Inc. and subsidiaries as listed in Item 14a(i). In connection with our audits of the consolidated financial statements, we also have audited the financial statement schedules as listed in Item 14a(ii). These consolidated financial statements and financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedules based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Century Telephone Enterprises, Inc. and subsidiaries as of December 31, 1995 and 1994, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1995, in conformity with generally accepted accounting principles. Also in our opinion, the related financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein. /s/ KPMG Peat Marwick LLP KPMG PEAT MARWICK LLP Shreveport, Louisiana January 29, 1996 CENTURY TELEPHONE ENTERPRISES, INC. Consolidated Statements of Income <TABLE> <CAPTION> Year ended December 31, - ----------------------------------------------------------------------------------------- 1995 1994 1993 - ----------------------------------------------------------------------------------------- (Dollars in thousands, except per share amounts) <S> <C> <C> <C> OPERATING REVENUES Telephone $419,242 391,265 350,330 Mobile Communications 197,494 150,802 84,712 Other 28,104 22,534 20,633 - ------------------------------------------------------------------------------------------ Total operating revenues 644,840 564,601 455,675 - ------------------------------------------------------------------------------------------ OPERATING EXPENSES Cost of sales and operating expenses 328,151 296,082 250,092 Depreciation and amortization 113,770 95,713 77,574 - ------------------------------------------------------------------------------------------ Total operating expenses 441,921 391,795 327,666 - ------------------------------------------------------------------------------------------ OPERATING INCOME 202,919 172,806 128,009 - ------------------------------------------------------------------------------------------ OTHER INCOME (EXPENSE) Interest expense (43,615) (42,577) (30,149) Income from unconsolidated cellular entities 20,084 15,698 6,626 Gain on sales of assets 6,782 15,877 1,661 Minority interest (8,084) (3,377) (516) Other income and expense 4,982 3,111 625 - ------------------------------------------------------------------------------------------ Total other income (expense) (19,851) (11,268) (21,753) - ------------------------------------------------------------------------------------------ INCOME BEFORE INCOME TAXES 183,068 161,538 106,256 Income tax expense 68,292 61,300 37,252 - ------------------------------------------------------------------------------------------ NET INCOME $114,776 100,238 69,004 ========================================================================================== PRIMARY EARNINGS PER SHARE $ 1.97 1.88 1.35 ========================================================================================== FULLY DILUTED EARNINGS PER SHARE $ 1.95 1.80 1.32 ========================================================================================== DIVIDENDS PER COMMON SHARE $ .33 .32 .31 ========================================================================================== See accompanying notes to consolidated financial statements. </TABLE> CENTURY TELEPHONE ENTERPRISES, INC. Consolidated Balance Sheets <TABLE> <CAPTION> December 31, - ----------------------------------------------------------------------------------------- 1995 1994 - ----------------------------------------------------------------------------------------- (Dollars in thousands) <S> <C> <C> ASSETS CURRENT ASSETS Cash and cash equivalents $ 8,540 7,154 Accounts receivable Customers, less allowance of $2,768 and $2,360 50,943 40,824 Other 24,219 23,180 Materials and supplies, at average cost 6,608 7,090 Other 5,019 2,980 - ----------------------------------------------------------------------------------------- Total current assets 95,329 81,228 - ----------------------------------------------------------------------------------------- NET PROPERTY, PLANT AND EQUIPMENT 1,047,808 947,131 - ----------------------------------------------------------------------------------------- INVESTMENTS AND OTHER ASSETS Excess cost of net assets acquired, less accumulated amortization of $52,944 and $40,756 493,655 441,436 Other 225,629 173,458 - ----------------------------------------------------------------------------------------- Total investments and other assets 719,284 614,894 - ----------------------------------------------------------------------------------------- TOTAL ASSETS $ 1,862,421 1,643,253 ========================================================================================= LIABILITIES AND EQUITY CURRENT LIABILITIES Current maturities of long-term debt $ 15,325 12,718 Notes payable 14,199 158,000 Accounts payable 55,329 52,331 Accrued expenses and other current liabilities Salaries and benefits 18,178 17,884 Taxes 12,489 16,530 Interest 6,024 8,243 Other 5,337 9,237 Advance billings and customer deposits 13,043 11,725 - ----------------------------------------------------------------------------------------- Total current liabilities 139,924 286,668 - ----------------------------------------------------------------------------------------- LONG-TERM DEBT 622,904 518,603 - ----------------------------------------------------------------------------------------- DEFERRED CREDITS AND OTHER LIABILITIES 211,169 187,746 - ----------------------------------------------------------------------------------------- STOCKHOLDERS' EQUITY Common stock, $1.00 par value, authorized 175,000,000 shares, issued and outstanding 59,113,670 and 53,574,361 shares 59,114 53,574 Paid-in capital 453,584 319,235 Retained earnings 387,424 291,999 Unearned ESOP shares (13,960) (16,840) Preferred stock - non-redeemable 2,262 2,268 - ----------------------------------------------------------------------------------------- Total stockholders' equity 888,424 650,236 - ----------------------------------------------------------------------------------------- TOTAL LIABILITIES AND EQUITY $ 1,862,421 1,643,253 ========================================================================================= See accompanying notes to consolidated financial statements. </TABLE> CENTURY TELEPHONE ENTERPRISES, INC. Consolidated Statements of Cash Flows <TABLE> <CAPTION> Year ended December 31, - ----------------------------------------------------------------------------------------- 1995 1994 1993 - ----------------------------------------------------------------------------------------- (Dollars in thousands) <S> <C> <C> <C> OPERATING ACTIVITIES Net income $114,776 100,238 69,004 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 113,770 95,713 77,574 Income from unconsolidated cellular entities (20,084) (15,698) (6,626) Minority interest 8,084 3,377 516 Deferred income taxes 9,563 7,423 6,781 Gain on sales of assets (6,782) (15,877) (1,661) Changes in current assets and current liabilities: Increase in accounts receivable (8,949) (1,581) (7,026) Increase (decrease) in accounts payable 2,656 (2,383) 11,024 Increase (decrease) in other accrued taxes (4,134) 8,347 (1,476) Changes in other current assets and other current liabilities, net (4,413) 6,543 2,135 Increase in other noncurrent liabilities 5,754 4,092 8,020 Other, net 5,497 9,610 8,489 - ----------------------------------------------------------------------------------------- Net cash provided by operating activities 215,738 199,804 166,754 - ----------------------------------------------------------------------------------------- INVESTING ACTIVITIES Payments for property, plant and equipment (196,592) (200,776) (204,229) Acquisitions, net of cash acquired (22,130) (55,979) (37,116) Investment in unconsolidated personal communications services entity (20,000) - - Note receivable 833 (25,000) - Investments in unconsolidated cellular entities (8,013) (5,516) (3,605) Distributions from unconsolidated cellular entities 4,957 5,969 1,587 Proceeds from sales of assets 19,953 10,475 - Purchase of life insurance investment (6,418) (7,664) (7,670) Other, net (396) (1,764) 2,361 - ----------------------------------------------------------------------------------------- Net cash used in investing activities (227,806) (280,255) (248,672) - ----------------------------------------------------------------------------------------- FINANCING ACTIVITIES Proceeds from issuance of long-term debt 203,987 155,427 35,847 Payments of long-term debt (18,377) (59,792) (32,564) Notes payable to banks, net (158,000) (7,700) 88,285 Proceeds from issuance of common stock 6,522 4,814 3,529 Cash dividends (19,351) (17,184) (15,735) Other, net (1,327) 2,263 2,562 - ----------------------------------------------------------------------------------------- Net cash provided by financing activities 13,454 77,828 81,924 - ----------------------------------------------------------------------------------------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,386 (2,623) 6 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 7,154 9,777 9,771 - ----------------------------------------------------------------------------------------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 8,540 7,154 9,777 ========================================================================================= See accompanying notes to consolidated financial statements. </TABLE> CENTURY TELEPHONE ENTERPRISES, INC. Consolidated Statements of Stockholders' Equity <TABLE> <CAPTION> Preferred Total Stock Common Stock- Unearned Non- Shares holders' Common Paid-in Retained ESOP redeem- Outstanding Equity Stock Capital Earnings Shares able - ------------------------------------------------------------------------------------------------------------------ (Dollars in thousands) <S> <C> <C> <C> <C> <C> <C> <C> 48,896,876 BALANCES, DECEMBER 31, 1992 $ 385,449 48,897 191,522 155,676 (11,100) 454 - Net income 69,004 - - 69,004 - - Issuance of common stock through dividend reinvestment, incentive 214,954 and benefit plans 3,529 215 3,314 - - - 2,182,875 Issuance of common stock for acquisitions 68,172 2,183 65,989 - - - Amortization of unearned compensation - and other 1,469 - 1,469 - - - - Release of ESOP shares 1,880 - - - 1,880 - - Common stock dividends - $.31 per share (15,703) - - (15,703) - - - Preferred stock dividends (32) - - (32) - - - ------------------------------------------------------------------------------------------------------------------ 51,294,705 BALANCES, DECEMBER 31, 1993 513,768 51,295 262,294 208,945 (9,220) 454 - Net income 100,238 - - 100,238 - - Issuance of common stock through dividend reinvestment, incentive 276,657 and benefit plans 4,814 277 4,537 - - - - Issuance of preferred stock for acquisition 1,875 - - - - 1,875 2,000,578 Issuance of common stock for acquisitions 52,311 2,000 50,311 - - - Conversion of preferred stock into 2,421 common stock - 2 59 - - (61) Amortization of unearned compensation - and other 2,034 - 2,034 - - - - Release of ESOP shares 2,380 - - - 2,380 - - Commitment to ESOP (10,000) - - - (10,000) - - Common stock dividends - $.32 per share (17,084) - - (17,084) - - - Preferred stock dividends (100) - - (100) - - - ------------------------------------------------------------------------------------------------------------------ 53,574,361 BALANCES, DECEMBER 31, 1994 650,236 53,574 319,235 291,999 (16,840) 2,268 - Net income 114,776 - - 114,776 - - Issuance of common stock through dividend reinvestment, incentive 421,545 and benefit plans 6,522 422 6,100 - - - 577,330 Issuance of common stock for acquisition 16,558 577 15,981 - - - Conversion of preferred stock 382 into common stock - 1 5 - - (6) Conversion of debentures 4,540,052 into common stock 113,136 4,540 108,596 - - - Amortization of unearned compensation - and other 3,667 - 3,667 - - - - Release of ESOP shares 2,880 - - - 2,880 - - Common stock dividends - $.33 per share (19,228) - - (19,228) - - - Preferred stock dividends (123) - - (123) - - - ------------------------------------------------------------------------------------------------------------------ 59,113,670 BALANCES, DECEMBER 31, 1995 $ 888,424 59,114 453,584 387,424 (13,960) 2,262 ================================================================================================================== See accompanying notes to consolidated financial statements. </TABLE> CENTURY TELEPHONE ENTERPRISES, INC. Notes to Consolidated Financial Statements December 31, 1995 (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of consolidation - The consolidated financial statements of Century Telephone Enterprises, Inc. and subsidiaries (the "Company") include the accounts of Century Telephone Enterprises, Inc. ("Century") and its majority-owned subsidiaries and partnerships. The Company's regulated telephone operations are subject to the provisions of Statement of Financial Accounting Standards No. 71, "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 (i) the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and (ii) the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Revenue recognition - Revenues are recognized when earned. Certain of the Company's telephone subsidiaries participate in revenue pools with other telephone companies for interstate revenue and for certain intrastate revenue. Such pools are funded by toll revenue and/or access charges within state jurisdictions and by access charges in the interstate market. Revenues earned through the various pooling processes are initially recorded based on the Company's estimates. Property, plant and equipment - Telephone plant is stated substantially at original cost of construction. Normal retirements of telephone property are charged against accumulated depreciation, along with the costs of removal, less salvage, with no gain or loss recognized. Renewals and betterments of plant and equipment are capitalized while repairs, as well as renewals of minor items, are charged to operating expense. Depreciation of telephone properties is provided on the straight line method, using class or overall group rates acceptable to the regulatory authorities; such rates range from 2.2% 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. Excess cost of net assets acquired - The excess cost of net assets acquired of substantially all of the Company's acquisitions accounted for as purchases (goodwill) is being amortized over forty years. The carrying value of goodwill is reviewed for impairment at least annually, or whenever events or changes in circumstances indicate that such carrying value may not be recoverable, by assessing the recoverability of such carrying value through estimated undiscounted future net cash flows. Affiliated transactions - Certain service subsidiaries of Century provide installation and maintenance services, materials and supplies, and managerial, technical and accounting services to subsidiaries. In addition, Century provides and bills management services to subsidiaries and in certain instances makes interest bearing advances to finance construction of plant and purchases of equipment. These transactions are recorded by the Company's telephone subsidiaries at their cost to the extent permitted by regulatory authorities. Intercompany profit on transactions with regulated affiliates is limited to a reasonable return on investment and has not been eliminated in connection with consolidating the results of operations of Century and its subsidiaries. Intercompany profit on transactions with nonregulated affiliates has been eliminated. Income taxes - Century files a consolidated federal income tax return with its eligible subsidiaries. The Company uses the asset and liability method of accounting for income taxes under which deferred tax assets and liabilities are established for the future tax consequences attributable to differences between the financial statement carrying amounts of assets and liabilities and their respective tax bases. Investment tax credits related to telephone plant have been deferred and are being amortized as a reduction of federal income tax expense over the estimated useful lives of the assets giving rise to the credits. Earnings per share - Primary earnings per share amounts are determined on the basis of the weighted average number of common shares and common stock equivalents outstanding during the year. The weighted average number of shares used in computing primary earnings per share was 58.1 million in 1995, 53.4 million in 1994, and 51.2 million in 1993. Fully diluted earnings per share amounts give further effect to convertible securities, primarily Century's convertible debentures (all of which were converted into common stock in 1995), which are not common stock equivalents. The weighted average number of shares used in computing fully diluted earnings per share was 59.1 million, 58.1 million and 55.9 million in 1995, 1994 and 1993, respectively. 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 1995 presentation, including (i) the results of operations of subsidiaries of the Company which are not included in telephone or mobile communications operations have been reclassified to operating income from other income and expense and (ii) the provision for uncollectible accounts in the Company's telephone operations, previously reflected as a reduction in other revenues, has been reclassified as an expense. (2) PROPERTY, PLANT AND EQUIPMENT Net property, plant and equipment at December 31, 1995 and 1994 was composed of the following: December 31, 1995 1994 - ----------------------------------------------------------------------- (Dollars in thousands) Telephone, at original cost Cable and wire $ 661,429 580,012 Central office 357,359 310,684 General support 99,145 91,722 Information origination/termination 24,394 21,478 Construction in progress 59,859 67,244 Other 5,161 5,356 - ------------------------------------------------------------------------ 1,207,347 1,076,496 Accumulated depreciation (357,633) (295,255) - ------------------------------------------------------------------------ 849,714 781,241 - ------------------------------------------------------------------------ Mobile Communications, at cost Cell site 140,462 104,553 General support 33,651 34,235 Construction in progress 16,162 12,602 Other 1,319 915 - ------------------------------------------------------------------------ 191,594 152,305 Accumulated depreciation (54,927) (38,552) - ------------------------------------------------------------------------ 136,667 113,753 - ------------------------------------------------------------------------ Corporate and other, at cost General support 86,149 81,932 Other 14,464 3,474 - ------------------------------------------------------------------------ 100,613 85,406 Accumulated depreciation (39,186) (33,269) - ------------------------------------------------------------------------ 61,427 52,137 - ------------------------------------------------------------------------ Net property, plant and equipment $1,047,808 947,131 ======================================================================== Depreciation expense was $102.1 million, $84.8 million and $70.7 million in 1995, 1994 and 1993, respectively. The composite depreciation rate for telephone properties was 7.5% for 1995 and 7.1% for 1994 and 1993. (3) INVESTMENTS AND OTHER ASSETS Investments and other assets at December 31, 1995 and 1994 were composed of the following: December 31, 1995 1994 - ------------------------------------------------------------------------------- (Dollars in thousands) Excess cost of net assets acquired, less accumulated amortization $ 493,655 441,436 Investments in unconsolidated cellular entities 83,552 59,360 Cash surrender value of life insurance contracts, net 54,697 47,637 Note receivable, less current portion 22,500 24,167 Investment in unconsolidated personal communications services entity, at cost 20,000 - Marketable equity securities 8,478 8,478 Other 36,402 33,816 - ------------------------------------------------------------------------------ $ 719,284 614,894 ============================================================================== Goodwill amortization of $11.4 million, $10.6 million and $6.2 million for 1995, 1994 and 1993, respectively, is included in "Depreciation and amortization." In 1995 the Company invested $20.0 million in exchange for a minority equity interest in an entity formed to participate in the Federal Communication Commission's auction of Basic Trading Area Personal Communications Services licenses. In 1994 Century loaned an unaffiliated telephone holding company $25.0 million. The loan bears interest at prime plus 1.5%; interest is due quarterly. Quarterly principal payments began in August 1995 and the unpaid balance becomes due in May 1998. Century received a security interest in the holding company's capital stock, a guaranty from such company's principal stockholder and first refusal rights to acquire certain properties under various specified circumstances. (4) INVESTMENTS IN UNCONSOLIDATED CELLULAR ENTITIES The Company's share of earnings from cellular entities in which it does not own a majority interest was $21.4 million, $16.9 million and $7.6 million in 1995, 1994 and 1993, respectively, and is included, net of $1.3 million, $1.2 million and $966,000 of amortization of goodwill attributable to such investments, in "Income from unconsolidated cellular entities." Over 77% of the 1995 income from unconsolidated cellular entities was attributable to the following investments. Ownership interest - ------------------------------------------------------------------------------ GTE Mobilnet of Austin Limited Partnership 35% Alltel Cellular Associates of Arkansas Limited Partnership 36% Lafayette MSA Limited Partnership 49% Detroit SMSA Limited Partnership 3% New Mexico 4 - Santa Fe RSA West Limited Partnership 36% - ------------------------------------------------------------------------------ The following summarizes the unaudited combined assets, liabilities and equity, and the unaudited combined results of operations, of the cellular entities in which the Company's investments are accounted for by the equity method. December 31, 1995 1994 - ------------------------------------------------------------------------------- (Dollars in thousands) (unaudited) Assets Current assets $204,222 76,191 Property and other noncurrent assets 487,073 277,269 - ------------------------------------------------------------------------------ $691,295 353,460 ============================================================================== Liabilities and equity Current liabilities $ 79,085 48,144 Noncurrent liabilities 6,922 11,080 Equity 605,288 294,236 - ------------------------------------------------------------------------------ $691,295 353,460 ============================================================================== Year ended December 31, 1995 1994 1993 - ----------------------------------------------------------------------------- (Dollars in thousands) (unaudited) Results of operations Revenues $743,779 329,907 236,230 Operating income $266,355 93,512 52,742 Net income $268,967 92,446 53,607 - ------------------------------------------------------------------------------ Consolidated retained earnings at December 31, 1995 which represented undistributed earnings of unconsolidated cellular entities was $30.4 million. (5) LONG-TERM DEBT December 31, 1995 1994 - ----------------------------------------------------------------------------- (Dollars in thousands) Century 6.0% convertible debentures $ - 115,000 8.25% senior notes, series B, due 2024 100,000 100,000 7.2% senior notes, series D, due 2025 100,000 - 9.4%* senior notes, due through 2004 60,400 65,000 7.75% senior notes, series A, due 2004 50,000 50,000 6.55% senior notes, series C, due 2005 50,000 - 6.07%* notes payable to banks, due 2000 22,500 - 7.2%* Employee Stock Ownership Plan commitment, due in installments through 2004 13,960 16,840 10.5%* notes, due in installments through 2006 674 975 - ----------------------------------------------------------------------------- Total Century 397,534 347,815 - ----------------------------------------------------------------------------- Subsidiaries First mortgage debt 5.9%* notes, payable to agencies of the United States government and cooperative lending associations, due in installments through 2026 202,037 166,175 6.8%* bonds, due in installments through 2002 4,760 7,094 Other debt 6.5% note, due in installments through 2001 13,714 - 7.4%* notes, due in installments through 2020 19,164 8,632 8.1%* capital lease obligations, due in installments through 1998 1,020 1,605 - ----------------------------------------------------------------------------- Total subsidiaries 240,695 183,506 - ----------------------------------------------------------------------------- Total long-term debt 638,229 531,321 Less current maturities 15,325 12,718 - ----------------------------------------------------------------------------- Long-term debt, excluding current maturities $622,904 518,603 ============================================================================= * weighted average interest rate at December 31, 1995 The approximate annual debt maturities (including sinking fund requirements) for the five years subsequent to December 31, 1995 are as follows: 1996 - $15.3 million; 1997 - $18.4 million; 1998 - $16.3 million; 1999 - $15.9 million; and 2000 - $69.8 million. In January 1995 Century called for redemption its $115.0 million of outstanding 6% convertible debentures due 2007. All of the debentures were converted into Century common stock by the debenture holders in February 1995 at a conversion price of $25.33 per share. If Century had issued common stock instead of the debentures, primary earnings per share for the years ended December 31, 1995, 1994 and 1993 would have been $1.95, $1.81 and $1.32, respectively. During the fourth quarter of 1995, Century issued $50.0 million of 10-year, 6.55% senior notes and $100.0 million of 30-year, 7.20% senior notes under the $400.0 million shelf registration statement that Century filed during the first quarter of 1994. The proceeds were used to reduce Century's short-term indebtedness under various credit facilities. Interest payments are due semi-annually and principal payments are due in 2005 and 2025 upon maturity of the 10-year and 30-year notes, respectively. The 30-year notes may be redeemed by Century at any time subject to certain "make-whole" provisions contained therein. In May 1994 Century issued $50.0 million of 10-year, 7.75% senior notes and $100.0 million of 30-year, 8.25% senior notes under the $400.0 million shelf registration statement filed during the first quarter of 1994. The proceeds were used to reduce certain of the Company's short-term bank indebtedness. Interest payments are due semi-annually and principal payments are due in 2004 and 2024 upon maturity of the 10-year and 30-year notes, respectively. The 30-year notes may be redeemed by Century on or after May 1, 2004 subject to a premium schedule which declines from 103.62% as of May 1, 2004 to 100% as of May 1, 2014. 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, 1995, 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, 1995, restricted net assets of subsidiaries were $253.8 million. Subsidiaries' retained earnings in excess of amounts restricted by debt covenants totaled $412.0 million. Most of the Company's telephone property, plant and equipment is pledged to secure the long-term debt of subsidiaries. At December 31, 1994, Century had in place certain long-term credit facilities under which the borrowings as of December 31, 1994 were included in "Notes payable" on the accompanying balance sheet. The weighted average interest rate for notes payable was 6.5% as of December 31, 1994. Short-term borrowings of $22.5 million at December 31, 1995, along with $30.0 million of debt becoming due in 1996, were classified as long-term debt on the accompanying balance sheet as the Company had available an aggregate of $145.0 million in its two long-term revolving credit facilities amended or entered into in 1995. The Company intends to refinance such debt using the facilities, both of which are multi-year agreements which expire in August 2000 and contain a variety of pricing options including competitive bid options. Century's telephone subsidiaries had approximately $142.6 million in commitments for long-term financing from the Rural Utilities Service available at December 31, 1995. Approximately $248.6 million of additional borrowings, of which $140.0 million were under uncommitted facilities, were available to the Company through lines of credit with various banks. In addition, Century had $100.0 million of senior unsecured debt securities under the 1994 shelf registration statement which had not been issued. (6) STOCK OPTION PROGRAM Century currently has an incentive compensation program which allows the Board of Directors, through the Compensation Committee, to grant incentives to employees in any one or a combination of the following forms: incentive stock options and non-qualified stock options; stock appreciation rights; restricted stock; and performance shares. Stock option transactions during 1993, 1994 and 1995 were as follows: Number Average of options price - ---------------------------------------------------------------------- Outstanding December 31, 1992 2,432,869 $ 20.72 Exercised (51,120) 9.90 - ------------------------------------------------------- Outstanding December 31, 1993 2,381,749 20.96 Exercised (139,282) 11.10 Granted at market price 31,000 26.25 - ------------------------------------------------------- Outstanding December 31, 1994 2,273,467 21.63 Exercised (272,300) 10.12 Granted above market price 634,031 36.15 - ------------------------------------------------------- Outstanding December 31, 1995 2,635,198 25.46 ======================================================= Exercisable December 31, 1994 2,143,873 21.57 - ------------------------------------------------------- Exercisable December 31, 1995 2,604,198 26.32 ======================================================= All of the options expire ten years after the date of grant. As of December 31, 1995, Century has reserved 4.0 million shares of common stock which may be issued under the incentive compensation program. The Company will adopt Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation," in 1996. The Company currently plans to continue to measure compensation cost for employee stock compensation plans using the method prescribed by Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees." (7) DEFERRED CREDITS AND OTHER LIABILITIES Deferred credits and other liabilities at December 31, 1995 and 1994 were composed of the following: December 31, 1995 1994 - ------------------------------------------------------------------------ (Dollars in thousands) Deferred federal and state income taxes $ 93,118 73,966 Accrued postretirement benefit costs 44,513 41,126 Regulatory liability - income taxes 27,027 31,278 Minority interest 29,354 22,585 Deferred investment tax credits 6,026 8,175 Other 11,131 10,616 - ------------------------------------------------------------------------- $211,169 187,746 ========================================================================= (8) INCOME TAXES Income tax expense for the years ended December 31, 1995, 1994 and 1993 was allocated as follows: Year ended December 31, 1995 1994 1993 - ------------------------------------------------------------------------------ (Dollars in thousands) Net tax expense in the consolidated statements of income $ 68,292 61,300 37,252 Stockholders' equity, primarily for compensation expense for tax purposes in excess of amounts recognized for financial reporting purposes (2,354) (1,243) (800) - ------------------------------------------------------------------------------- $ 65,938 60,057 36,452 =============================================================================== The tax effects of temporary differences that gave rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 1995 and 1994 were as follows: December 31, 1995 1994 - ---------------------------------------------------------------------------- (Dollars in thousands) Deferred tax assets: Postretirement benefit costs $ 15,314 12,908 Net operating loss carryforwards of an acquired subsidiary 9,234 10,283 Regulatory liability 9,460 10,948 Deferred compensation 2,659 2,676 Deferred investment tax credits 1,918 2,658 Other employee benefits 4,673 4,205 Other 3,227 2,556 - ---------------------------------------------------------------------------- Total gross deferred tax assets 46,485 46,234 Less valuation allowance (9,234) (10,283) - ---------------------------------------------------------------------------- Net deferred tax assets 37,251 35,951 - ---------------------------------------------------------------------------- Deferred tax liabilities: Property, plant and equipment, primarily due to depreciation differences (117,095) (97,073) Intercompany profits (3,787) (3,497) Other (9,487) (9,347) - ---------------------------------------------------------------------------- Total gross deferred tax liabilities (130,369) (109,917) - ---------------------------------------------------------------------------- Net deferred tax liability $ (93,118) (73,966) ============================================================================ As a result of the acquisition of Celutel, Inc. ("Celutel") (see Note 14) the Company had $26.4 million and $29.4 million of net operating loss carryforwards at December 31, 1995 and 1994, respectively, which related to various entities acquired. The yearly utilization of such loss carryforwards is limited to separate entity taxable income; the loss carryforwards are further limited by certain Internal Revenue Code regulations. During 1995 the Company utilized $3.0 million of such losses; the related tax benefits reduced excess cost of net assets acquired. Subsequently recognized tax benefits applicable to the net operating loss carryforwards will reduce excess cost of net assets acquired. The net operating loss carryforwards expire between 2002 and 2008. Income tax expense was as follows: Year ended December 31, 1995 1994 1993 - ---------------------------------------------------------------------- (Dollars in thousands) Federal Current $53,554 47,969 26,409 Deferred 9,021 5,703 6,133 State Current 5,175 5,908 4,062 Deferred 542 1,720 648 - ---------------------------------------------------------------------- $68,292 61,300 37,252 ====================================================================== The following is a reconciliation from the statutory federal income tax rate to the Company's effective income tax rate: Year ended December 31, 1995 1994 1993 - -------------------------------------------------------------------------- (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 2.0 3.0 2.9 Amortization of nondeductible excess cost of net assets acquired 1.8 2.1 1.2 Amortization of investment tax credits (1.3) (1.4) (2.0) Amortization of regulatory liability (1.0) (1.2) (1.8) Other, net .8 .4 (.2) - -------------------------------------------------------------------------- Effective income tax rate 37.3% 37.9 35.1 ========================================================================== (9) POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS The Company sponsors defined benefit health care plans that provide postretirement medical, life and dental benefits to substantially all retired full-time employees. Net periodic postretirement benefit cost for 1995, 1994 and 1993 included the following components: Year ended December 31, 1995 1994 1993 - ----------------------------------------------------------------------------- (Dollars in thousands) Service cost $1,769 2,007 1,640 Interest cost 3,972 3,473 3,008 Amortization of unrecognized actuarial losses (gains) (50) 447 365 Amortization of unrecognized prior service cost 121 121 86 - ----------------------------------------------------------------------------- Net periodic postretirement benefit cost $5,812 6,048 5,099 ============================================================================= The following table sets forth the amounts recognized as liabilities for postretirement benefits in the Company's consolidated balance sheets at December 31, 1995 and 1994. December 31, 1995 1994 - ----------------------------------------------------------------------------- (Dollars in thousands) Accumulated postretirement benefit obligation: Retirees and retirees' dependents $ 26,185 19,079 Fully eligible active plan participants 9,972 8,300 Other active plan participants 23,971 16,430 - ----------------------------------------------------------------------------- Accumulated postretirement benefit obligation 60,128 43,809 Plan assets - - Unrecognized prior service cost (1,424) (1,546) Unrecognized net gain (loss) (12,881) 173 - ----------------------------------------------------------------------------- Accrued postretirement benefit costs $ 45,823 42,436 ============================================================================= For calculation purposes, a 7% health care cost rate was assumed for the first two years; the rate was assumed to decrease to 6% thereafter. If the assumed health care cost trend rate had been increased by one percentage point in each year, the accumulated postretirement benefit obligation as of December 31, 1995 would have increased $5.3 million and the net periodic postretirement benefit cost for the year ended December 31, 1995 would have increased $405,000. The discount rates used in determining the accumulated postretirement benefit obligation as of December 31, 1995 and 1994 were 7.25% and 8.5%, respectively. In the first quarter of 1994 the Company adopted Statement of Financial Accounting Standards No. 112 ("SFAS 112"), "Employers' Accounting for Postemployment Benefits." Liabilities for postemployment benefits in the consolidated balance sheet as of December 31, 1993 were not materially different than those required by SFAS 112; therefore, no cumulative effect of change in accounting principle was recorded upon adoption of SFAS 112. (10) STOCKHOLDERS' EQUITY Common stock - At December 31, 1995, unissued shares of Century common stock were reserved as follows: December 31, 1995 - ---------------------------------------------------------------- (In thousands) Stock option plans 4,001 Acquisitions 1,178 Employee stock purchase plan 506 Dividend reinvestment plan 166 Conversion of convertible preferred stock 193 Other employee benefit plans 1,238 - ---------------------------------------------------------------- 7,282 ================================================================ 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, 1995, 8.1 million shares of common stock were entitled to ten votes per share. Preferred stock - As of December 31, 1995, Century had 2.0 million shares of preferred stock, $25 par value per share, authorized. At December 31, 1995 and 1994 there were 90,467 and 90,707 shares, respectively, of outstanding preferred stock. Holders of currently outstanding Century preferred stock are entitled to (i) receive cumulative dividends, (ii) receive preferential distributions equal to $25 per share plus unpaid dividends upon Century's liquidation and (iii) vote as a single class with the holders of common stock. Shareholders' Rights Plan - In 1986 the Board of Directors declared a dividend of one preferred stock purchase right for each common share outstanding or that shall become outstanding prior to November 26, 1996. With certain exceptions, if a person or group acquires beneficial ownership of 15% or more of Century common shares or commences a tender or exchange offer which upon consummation would result in ownership of 30% or more of the common shares, each right held by shareholders, other than such person or group, may be exercised to buy (i) eight twenty-sevenths of one one-hundredth of a share of Series AA Junior Participating Preferred Stock of Century at a price of $85 per one one-hundredth of a share or (ii) in lieu thereof, subject to certain restrictions, the number of shares of Century common stock having a market value equal to two times such purchase price. The rights, which do not have voting rights, expire on November 27, 1996 and may be redeemed by Century at a price of $.05 per right at any time before they become exercisable. If, at any time the rights are exercisable, Century is a party to a merger or other business combination or certain other transactions occur, each right will entitle its holder to purchase at the exercise price of the right a number of shares of common stock of the surviving company having a fair market value of two times the exercise price of the right. At December 31, 1995, 167,000 shares of Series AA Junior Participating Preferred Stock were reserved for issuance under the Rights Plan. (11) SALES OF ASSETS In the first quarter of 1995 the Company sold, for an aggregate of approximately $17.9 million cash, its ownership interests in certain non-strategic cellular Rural Service Areas ("RSAs") located primarily in western states and three Metropolitan Statistical Areas ("MSAs") in the midwest. These transactions resulted in a pre-tax gain of $5.9 million ($2.0 million after-tax). During the fourth quarter of 1995, the Company sold certain assets of one of its subsidiaries for $2.0 million which resulted in a pre-tax gain of $873,000 ($567,000 after-tax). In 1994 the Company sold the assets comprising an RSA cellular system in Minnesota; the Company received (i) the assets of the Pine Bluff, Arkansas MSA wireline cellular system and (ii) $10.5 million cash. The transaction resulted in a pre-tax gain of $14.7 million ($8.5 million after-tax). The Company also sold the assets of its paging operations during 1994 and recognized a gain of $1.2 million ($756,000 after-tax). During 1993 the Company sold a minority investment in a telephone company which resulted in a pre-tax gain of $1.7 million ($1.1 million after-tax). (12) 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. SFAS 71 requires that, if a conflict exists between the application of SFAS 71 and another authoritative pronouncement, SFAS 71 is to be followed because other authoritative pronouncements do not consider the economic effects of the rate-making process. Therefore, regulatory assets and liabilities established by the actions of a regulator are required to be recorded, and, accordingly, reflected in the balance sheet of an entity subject to SFAS 71. The Company's consolidated balance sheet as of December 31, 1995 included regulatory assets of approximately $8.7 million and regulatory liabilities of approximately $27.0 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 $8.7 million of regulatory assets included assets established in connection with the adoption of Statement of Financial Accounting Standards No. 106, "Employers Accounting for Postretirement Benefits Other Than Pensions" ($2.1 million) and Statement of Financial Accounting Standards No. 109 ("SFAS 109"), "Accounting For Income Taxes" ($3.2 million), extraordinary retirements ($305,000), compensated absences ($401,000) and deferred financing costs ($2.7 million). The $27.0 million of regulatory liabilities was established in connection with the adoption of SFAS 109. Net deferred income tax assets related to the regulatory assets and liabilities quantified above were $7.4 million. Property, plant and equipment of the Company's regulated telephone operations has been depreciated using generally the straight line method over lives approved by regulators. Such depreciable lives have generally exceeded the depreciable lives used by nonregulated entities. In addition, in accordance with regulatory accounting, retirements of regulated telephone property have been charged to accumulated depreciation, along with the costs of removal, less salvage, with no gain or loss recognized. These regulatory accounting policies have resulted in accumulated depreciation being significantly less than if the Company's telephone operations had not been regulated. Statement of Financial Accounting Standards No. 101 ("SFAS 101"), "Regulated Enterprises Accounting for the Discontinuance of Application of FASB Statement No. 71," specifies the accounting required when an enterprise ceases to meet the criteria for application of SFAS 71. SFAS 101 requires the elimination of the effects of any actions of regulators that have been recognized as assets and liabilities in accordance with SFAS 71 but would not have been recognized as assets and liabilities by enterprises in general. SFAS 101 further provides that the carrying amounts of property, plant and equipment are to be adjusted only to the extent the assets are impaired and that impairment shall be judged in the same manner as for enterprises in general. The Company has not determined (i) the amount of additional accumulated depreciation which will have to be recorded nor (ii) the amount, if any, by which property, plant and equipment would be impaired when the Company's regulated operations cease to become subject to SFAS 71. In addition, 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. 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. Telephone subsidiaries accounting and reporting for regulatory purposes will not be affected by the discontinued application of SFAS 71. (13) RETIREMENT AND SAVINGS PLANS Century sponsors an Outside Directors' Retirement Plan and a Supplemental Executive Retirement Plan to provide directors and officers, respectively, with supplemental retirement, death and disability benefits. In addition, the bargaining unit employees of a subsidiary are provided benefits under a defined benefit pension plan. At December 31, 1995 and 1994, the combined accumulated benefit obligation of the plans, substantially all of which was vested, aggregated $18.4 million and $15.2 million, respectively. The projected benefit obligation in excess of plan assets was $823,000 and $2.7 million as of December 31, 1995 and 1994, respectively. During 1995 and 1994 Century funded $2.5 million and $3.0 million, respectively, of the obligations of the plans. Prepaid pension cost was $2.5 million at December 31, 1995 and $525,000 at December 31, 1994. The net periodic pension cost in 1995, 1994 and 1993 was $928,000, $1.2 million and $1.1 million, respectively. Discount rates used in determining the year end liabilities were 7.25% for 1995 and 8.5% for 1994. Century sponsors an Employee Stock Bonus Plan ("ESBP") and an Employee Stock Ownership Plan ("ESOP"). These plans cover most employees with one year of service with the Company and are funded by Company contributions determined annually by the Board of Directors. Century also sponsors a qualified profit sharing plan pursuant to Section 401(k) of the Internal Revenue Code (the "401(k) Plan") which is available to substantially all employees of the Company. The Company's matching contributions to the 401(k) Plan were $2.4 million in 1995 and 1994 and $2.0 million in 1993. The Company recorded contributions related to the ESBP in the amount of $1.6 million, $2.3 million and $1.8 million during 1995, 1994 and 1993, respectively. At December 31, 1995, the ESBP owned 4.3 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 $5.5 million at December 31, 1995 which was applicable to shares purchased prior to 1993. Interest incurred by the ESOP on debt applicable to such shares was $580,000, $728,000 and $895,000 in 1995, 1994 and 1993, respectively. The Company contributed and expensed $2.3 million, $1.9 million and $2.6 million during 1995, 1994 and 1993, respectively, with respect to such shares. Dividends on unallocated ESOP shares used for debt service by the ESOP were $170,000 in 1995, $288,000 in 1994 and $335,000 in 1993. ESOP shares as of December 31, 1995 and 1994 which were purchased prior to 1993 were as follows: December 31, 1995 1994 - ---------------------------------------------------------- (In thousands) Allocated shares 1,338 1,164 Unreleased shares 490 707 - ---------------------------------------------------------- 1,828 1,871 ========================================================== 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 $1.3 million for 1995 and $605,000 for 1994. The fair value of unreleased ESOP shares accounted for under SOP 93-6 was $11.2 million and $11.7 million at December 31, 1995 and December 31, 1994, respectively. ESOP shares purchased subsequent to 1992 totaled 416,850, of which 62,527 were allocated and 354,323 were unreleased as of December 31, 1995. (14) MAJOR ACQUISITIONS In February 1994 the Company acquired Celutel for approximately $106.0 million in a stock and cash transaction accounted for as a purchase. Approximately $56.0 million of the purchase price was paid in cash, with the remainder paid through the issuance of approximately 1.9 million shares of Century common stock. At acquisition, Celutel provided cellular service to approximately 29,000 customers in five non-wireline provider systems in MSAs in Mississippi and Texas. In April 1993 the Company acquired San Marcos Telephone Company, Inc. ("SMTC") in a stock and cash transaction and acquired SM Telecorp, Inc., an affiliate of SMTC, for cash. The total acquisition price for both companies approximated $100.0 million, the stock portion of which was represented by approximately 2.2 million shares of Century common stock. As a result of the acquisitions, which were accounted for as purchases, the Company acquired approximately 22,500 telephone access lines in and around San Marcos, Texas, along with a 35% ownership interest in the Austin, Texas MSA wireline cellular market and a 9.6% interest in the Texas RSA #16 wireline cellular market. The following pro forma information represents the consolidated results of operations of the Company as if (i) the Celutel acquisition had been combined with the Company as of January 1 of 1994 and 1993 and (ii) the San Marcos acquisition had been combined with the Company as of January 1, 1993. Year ended December 31, 1994 1993 - ---------------------------------------------------------------------------- (Dollars in thousands, except per share amounts) (unaudited) Operating revenues $ 543,768 467,862 Net income $ 98,958 62,516 Fully diluted earnings per share $ 1.77 1.15 - ---------------------------------------------------------------------------- The pro forma information is not necessarily indicative of the operating results that would have occured if each major acquisition had been consummated as of January 1 of each respective period, nor is it necessarily indicative of future operating results. The actual results of operations of an acquired company are included in the Company's consolidated financial statements only from the date of acquisition. (15) SUPPLEMENTAL CASH FLOW DISCLOSURES The Company paid interest of $45.8 million, $40.8 million and $30.1 million during 1995, 1994 and 1993, respectively. Income taxes paid were $62.4 million in 1995, $41.3 million in 1994 and $37.1 million in 1993. Century has consummated the acquisition of various telephone and cellular operations, along with certain other assets, during the three years ended December 31, 1995. In connection with these acquisitions, the following assets were acquired, liabilities assumed and common and preferred stock issued: Year ended December 31, 1995 1994 1993 - ------------------------------------------------------------------------------ (Dollars in thousands) Property, plant and equipment $ 16,949 11,301 33,020 Excess cost of net assets acquired 70,124 152,239 85,251 Investments in unconsolidated cellular entities 2,804 - 7,508 Notes payable (14,199) - - Long-term debt (38,147) (46,478) (18,609) Deferred credits and other liabilities (1,880) (5,706) (7,648) Other assets and liabilities, excluding cash and cash equivalents 3,037 (1,191) 5,766 Common stock issued (16,558) (52,311) (68,172) Preferred stock issued - (1,875) - - ------------------------------------------------------------------------------ Decrease in cash due to acquisitions $ 22,130 55,979 37,116 ============================================================================== Century has consummated the disposition of various telephone and cellular operations, along with certain other assets, during the three years ended December 31, 1995. In connection with these dispositions, the following assets were sold, liabilities eliminated, assets received and gain recognized: Year ended December 31, 1995 1994 1993 - ---------------------------------------------------------------------------- (Dollars in thousands) Property, plant and equipment $ (4,399) (2,673) - Excess cost of net assets acquired (4,494) (3,976) - Other assets and liabilities, excluding cash and cash equivalents (4,278) 993 1,661 Assets of cellular system - 11,058 - Gain on sales of assets (6,782) (15,877) (1,661) - ---------------------------------------------------------------------------- Increase in cash due to dispositions $ (19,953) (10,475) - ============================================================================ In February 1995 Century's $115.0 million of outstanding 6% convertible debentures were converted into Century common stock by the debenture holders at a conversion price of $25.33 per share. (16) BUSINESS SEGMENTS The Company operates in two principal segments - traditional telephone services and mobile communications services. The Company's telephone operations are conducted in rural, suburban and small urban communities in 14 states. Approximately 80% of the Company's telephone access lines are in Wisconsin, Louisiana, Michigan, Ohio and Arkansas. The Company's cellular customers are located primarily in Louisiana, Michigan, Mississippi and Texas. Other accounts receivable are primarily amounts due from various long distance carriers, principally AT&T, and several large local exchange operating companies. <TABLE> <CAPTION> Mobile Telephone Communications Other Eliminations Total - ----------------------------------------------------------------------------------------- (Dollars in thousands) <S> <C> <C> <C> <C> <C> Year ended December 31, 1995 - ----------------------------------------------------------------------------------------- Operating revenues $ 419,242 197,494 39,580 (11,476) 644,840 Depreciation and amortization $ 86,324 25,427 2,019 - 113,770 Operating income $ 143,527 57,009 2,383 - 202,919 Year ended December 31, 1994 - ----------------------------------------------------------------------------------------- Operating revenues $ 391,265 150,802 33,272 (10,738) 564,601 Depreciation and amortization $ 73,175 21,255 1,283 - 95,713 Operating income $ 137,992 31,443 3,371 - 172,806 Year ended December 31, 1993 - ----------------------------------------------------------------------------------------- Operating revenues $ 350,330 84,712 30,523 (9,890) 455,675 Depreciation and amortization $ 65,175 11,359 1,040 - 77,574 Operating income $ 114,902 9,906 3,201 - 128,009 - ----------------------------------------------------------------------------------------- </TABLE> Year ended December 31, 1995 1994 1993 - ------------------------------------------------------------------------------- (Dollars in thousands) Operating income $ 202,919 172,806 128,009 Interest expense (43,615) (42,577) (30,149) Income from unconsolidated cellular entities 20,084 15,698 6,626 Gain on sales of assets 6,782 15,877 1,661 Minority interest (8,084) (3,377) (516) Other income and expense 4,982 3,111 625 - ------------------------------------------------------------------------------- Income before income taxes $ 183,068 161,538 106,256 =============================================================================== Capital expenditures Telephone $ 136,006 152,336 131,180 Mobile Communications $ 41,990 39,937 56,092 Corporate and other $ 18,596 8,503 16,957 =============================================================================== Identifiable assets Telephone $1,114,827 1,053,950 969,388 Mobile Communications 547,260 430,777 224,913 General corporate 109,096 88,305 62,827 Other 91,238 70,221 62,262 - ------------------------------------------------------------------------------- Total assets $1,862,421 1,643,253 1,319,390 =============================================================================== (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, 1995 and 1994. Carrying Fair amount value - ------------------------------------------------------------------------------ (Dollars in thousands) December 31, 1995 - ------------------------------------------------------------------------------ Financial assets: Investments Note receivable (including current portion) $ 24,167 24,167 (1) Marketable equity securities $ 8,478 8,672 (2) Other equity investment $ 20,000 20,000 (1) Other $ 9,912 9,912 (1) Financial liabilities: Long-term debt (including current maturities) $ 638,229 638,383 (3) Other $ 13,043 13,043 (1) - ------------------------------------------------------------------------------ December 31, 1994 - ------------------------------------------------------------------------------ Financial assets: Investments Note receivable (including current portion) $ 25,000 25,000 (1) Marketable equity securities $ 8,478 10,127 (2) Other $ 9,069 9,069 (1) Financial liabilities: Long-term debt (including current maturities) $ 531,321 520,151 (3) Other $ 11,725 11,725 (1) - ------------------------------------------------------------------------------ (1) Fair value was estimated by the Company. (2) Fair value was based on quoted market prices. (3) Fair value was estimated by discounting the scheduled payment streams to present value based upon rates currently offered to the Company for similar debt. Cash and cash equivalents, accounts receivable, notes payable, accounts payable and accrued expenses - The carrying amount approximates the fair value due to the short maturity of these instruments. (18) COMMITMENTS AND CONTINGENCIES Construction expenditures and investments in vehicles, buildings and other work equipment during 1996 are estimated to be $102 million for telephone operations, $61 million for mobile communications operations and $26 million for corporate and other operations. The Company is involved in various claims and legal actions arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on the Company's consolidated financial position or results of operations. CENTURY TELEPHONE ENTERPRISES, INC. Consolidated Quarterly Income Information (unaudited) <TABLE> <CAPTION> First Second Third Fourth Quarter Quarter Quarter Quarter - -------------------------------------------------------------------------------------- (Dollars in thousands, except per share amounts) 1995 - -------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> Operating revenues $148,779 156,815 167,304 171,942 Operating income $ 47,961 49,682 56,392 48,884 Net income $ 27,000 26,167 31,880 29,729 Fully diluted earnings per share $ .47 .45 .54 .50 - -------------------------------------------------------------------------------------- 1994 - -------------------------------------------------------------------------------------- Operating revenues $127,350 138,865 147,786 150,600 Operating income $ 36,337 42,123 47,311 47,035 Net income $ 19,201 21,485 24,613 34,939 Fully diluted earnings per share $ .35 .39 .44 .62 - -------------------------------------------------------------------------------------- </TABLE> The results of operations of subsidiaries of the Company which are not included in telephone or mobile communications operations have been reclassified to operating income from other income and expense, and the provision for uncollectible accounts in the Company's telephone operations, previously reflected as a reduction in other revenues, has been reclassified as an expense. Fully diluted earnings per share for the first quarter and the fourth quarter of 1995 included $.03 and $.01 per share, respectively, of gain on the sales of assets. Fully diluted earnings per share for the fourth quarter of 1995 was reduced by $.04 per share related to cellular commissions incurred (during the fourth quarter of 1995 as compared to the average of the first three quarters of 1995) as a result of the significant increase in the number of cellular subscribers activated during the quarter. Fully diluted earnings per share for the fourth quarter of 1994 included $.16 per share of gain on the sales of assets; such increase in fully diluted earnings per share was partially offset by a decrease of $.03 per share related to cellular commissions incurred (during the fourth quarter of 1994 as compared to the average of the first three quarters of 1994) as a result of the significant increase in the number of cellular subscribers activated during the quarter. 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 effective through May 1996 and from year to year thereafter subject to the right of Mr. Williams or the Company to terminate such agreement. Name Age Office(s) held with Century - ----------------------------------------------------------------- Clarke M. Williams 74 Chairman of the Board of Directors Glen F. Post, III 43 Vice Chairman of the Board of Directors, President and Chief Executive Officer R. Stewart Ewing, Jr. 44 Senior Vice President and Chief Financial Officer W. Bruce Hanks 41 President - Telecommunications Services Harvey P. Perry 51 Senior Vice President, General Counsel and Secretary Kenneth R. Cole 48 President - Telephone Group Each of the Registrant's executive officers has served as an officer of the Registrant and/or one or more of its subsidiaries in varying capacities for more than the past 5 years. Mr. Cole has served as President-Telephone Group since January 1995 and as Vice President from 1983 to 1994. The balance of the information required by Item 10 is incorporated by reference to the Registrant's definitive proxy statement relating to its 1996 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, 1995, 1994 and 1993 Consolidated Balance Sheets - December 31, 1995 and 1994 Consolidated Statements of Cash Flows for the Years Ended December 31, 1995, 1994 and 1993 Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 1995, 1994 and 1993 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. The following item was reported in the Form 8-K dated November 7, 1995: Item 5. Other Events - News release reporting results of operations for the quarter ended September 30, 1995. The following item was reported in the Form 8-K dated November 29, 1995: Item 5. Other Events - News release reporting investment in GO Communications Corporation. c. Exhibits: 3(i) Amended and Restated Articles of Incorporation of Registrant, dated as of May 23, 1995 (incorporated by reference to Exhibit 4.1 to Registration No.33-60061). 3(ii) Registrant's Bylaws, as amended through May 23, 1995 (incorporated by reference to Exhibit 4.2 to Registration No. 33-60061). 4.1 Competitive Advance and Revolving Credit Facility Agreement, dated October 17, 1995, between Registrant and Bank One of Texas, N.A. (incorporated by reference to Exhibit 4.2 to Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1995). 4.2 Note Purchase Agreement, dated September 1, 1989, between Registrant, Teachers Insurance and Annuity Association of America and the Lincoln National Life Insurance Company (incorporated by reference to Exhibit 4.23 to Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1989). 4.12 Amended and Restated Rights Agreement dated as of November 17, 1986 between Century Telephone Enterprises, Inc. and the Rights Agent named therein (incorporated by reference to Exhibit 4.1 to Registrant's Current Report on Form 8-K dated December 20, 1988), the Amendment thereto dated March 26, 1990 (incorporated by reference to Exhibit 4.1 to Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 1990) and the Second Amendment thereto dated February 23, 1993 (incorporated by reference to Exhibit 4.12 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1992). 4.16 Note Purchase Agreement, dated May 6, 1986, among Registrant, Teachers Insurance and Annuity Association of America, Aetna Life Insurance Company, the Aetna Casualty and Surety Company and Lincoln National Pension Insurance Company (incorporated by reference to Exhibit 4.23 to Registration No. 33-5836), Amendatory Agreement dated November 1, 1986 (incorporated by reference to Exhibit 4.2 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1986), amendment thereto dated November 1, 1987 (incorporated by reference to Exhibit 4.2 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1987) and Modification Letter dated September 1, 1989 (incorporated by reference to Exhibit 19.6 to Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1989). 4.22 Form of common stock certificate of the Registrant (incorporated by reference to Exhibit 4.1 to Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1993). 4.24 Revolving Credit Facility Agreement, dated February 7, 1992 between Registrant and NationsBank of Texas, N.A. (incorporated by reference to Exhibit 4.24 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1991), amendment thereto dated April 8, 1993 (incorporated by reference to Exhibit 19.2 to Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 1993), amendment thereto dated July 9, 1993 (incorporated by reference to Exhibit 4.24 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1993), amendment thereto dated August 15, 1994 (incorporated by reference to Exhibit 4.1 to Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1994) and amendment thereto dated October 5, 1995 (incorporated by reference to Exhibit 4.1 to Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1995). 4.25 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). 4.26 Resolutions adopted by the Executive Committee of the Board of Directors on April 29, 1994 designating the terms and conditions of the Company's 7-3/4% Senior Notes, Series A, due 2004 and 8-1/4% Senior Notes, Series B, due 2024 ("Senior Notes") (incorporated by reference to Exhibit 4.1 to Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 1994). 4.27 Resolutions adopted by the Special Pricing Committee of the Board of Directors on November 27, 1995 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"), included elsewhere herein. 4.28 Form of Senior Notes (incorporated by reference to Exhibit 4.3 of the Company's Registration Statement on Form S-3, Registration No. 33-52915). 10.1 Employee Benefit Plans (a) Registrant's Employee Stock Ownership Plan and Trust, as amended and restated December 30, 1994 (incorporated by reference to Exhibit 10.1 to Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 1995) and amendment thereto dated January 26, 1996, included elsewhere herein. (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) and amendment thereto dated January 26, 1996, included elsewhere herein. (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). (d) Registrant's Restated Supplemental Executive Retirement Plan, generally effective as of November 16, 1995, included elsewhere herein. (e) Registrant's 1983 Restricted Stock Plan, dated February 21, 1984, as amended and restated as of November 16, 1995, included elsewhere herein. (f) Registrant's Key Employee Incentive Compensation Plan, dated January 1, 1984, as amended and restated as of November 16, 1995, included elsewhere herein. (g) Registrant's 1988 Incentive Compensation Program as amended and restated August 22, 1989 (incorporated by reference to Exhibit 19.8 to Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1989). (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). (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). (m) Form of Stock Option Agreement, pursuant to 1995 Incentive Compensation Plan and dated as of May 22, 1995, entered into by Registrant and its officers (incorporated by reference to Exhibit 10.5 to Registrant's Quarterly Report on From 10-Q for the quarter ended June 30, 1995). (n) Form of Stock Option Agreement, pursuant to 1995 Incentive Compensation Plan and dated as of June 23, 1995, entered into by Registrant and certain key employees (incorporated by reference to Exhibit 10.6 to Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1995). (o) Form of Performance Share Agreement Under the 1990 Incentive Compensation Program, entered into in 1993 with certain of its officers and employees (incorporated by reference to Exhibit 28.1 to Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 1993) and amendment thereto dated as of May 22, 1995 (incorporated by reference to Exhibit 10.3 to Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1995). (p) Form of Restricted Stock Agreement and Performance Share Agreement Under the 1988 Incentive Compensation Program, entered into in 1993 with certain of its officers and employees (incorporated by reference to Exhibit 28.2 to Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 1993) and amendment thereto dated as of May 22, 1995 (incorporated by reference to Exhibit 10.4 to Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1995). (q) Registrant's Restated Supplemental Defined Contribution Plan, dated as of November 16, 1995, included elsewhere herein. (r) 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). (s) 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). (t) Registrant's Restated Outside Directors' Retirement Plan, dated as of November 16, 1995, included elsewhere herein. (u) Registrant's Restated Deferred Compensation Plan for Outside Directors, dated as of November 16, 1995, included elsewhere herein. 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, included elsewhere herein. (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, included elsewhere herein. (c) Form of Amended and Restated Severance Agreement, by and between Registrant and six of its officers who are not executive officers, dated as of November 16, 1995, included elsewhere herein. (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). 10.3 Other Agreements (a) Agreement and Plan of Merger dated October 8, 1993, as amended by Amendment No. 1 thereto dated January 5, 1994 by and among Registrant, Celutel Acquisition Corp., Celutel, Inc. and the Principal Stockholders of Celutel, Inc. (incorporated by reference to Appendix I of Registrant's Prospectus forming a part of its Registration Statement No.33-50791 filed January 12, 1994 pursuant to Rule 424(b)(5)). (b) Loan Agreement and Grant of Rights of First Refusal to Acquire Assets and/or Capital Stock of MillTenn, Inc. and its Subsidiaries (incorporated by reference to Exhibit 10.1 to Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 1994). 11 Computations of Earnings Per Share, included else- where herein. 21 Subsidiaries of the Registrant, included elsewhere herein. 23 Independent Auditors' Consent, included elsewhere herein. 27 Financial Data Schedule, included elsewhere herein. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CENTURY TELEPHONE ENTERPRISES, INC. Date: March 18, 1996 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 18, 1996 /s/ Glen F. Post, III Vice Chairman of the - ------------------------- Board of Directors, Glen F. Post, III President, and Chief Executive Officer March 18, 1996 /s/ R. Stewart Ewing, Jr. Senior Vice President - ------------------------- and Chief Financial R. Stewart Ewing, Jr. Officer March 18, 1996 /s/ Harvey P. Perry Senior Vice President, - ------------------------- Secretary, General Harvey P. Perry Counsel and Director March 18, 1996 /s/ W. Bruce Hanks - ------------------------- President - Telecommunications W. Bruce Hanks Services and Director March 18, 1996 /s/ Murray H. Greer - ------------------------- Controller (Principal Murray H. Greer Accounting Officer) March 18, 1996 /s/ William R. Boles, Jr. - ------------------------- Director William R. Boles, Jr. March 18, 1996 /s/ Virginia Boulet - ------------------------- Director Virginia Boulet March 18, 1996 /s/ Ernest Butler, Jr. - ------------------------- Director Ernest Butler, Jr. March 18, 1996 - ------------------------- Director Calvin Czeschin March __, 1996 /s/ James B. Gardner - ------------------------- Director James B. Gardner March 18, 1996 /s/ R. L. Hargrove, Jr. - ------------------------- Director R. L. Hargrove, Jr. March 18, 1996 /s/ Johnny Hebert - ------------------------- Director Johnny Hebert March 18, 1996 /s/ F. Earl Hogan - ------------------------- Director F. Earl Hogan March 18, 1996 /s/ C. G. Melville, Jr. - ------------------------- Director C. G. Melville, Jr. March 18, 1996 /s/ Jim D. Reppond Director - ------------------------- Jim D. Reppond March 18, 1996 SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT CENTURY TELEPHONE ENTERPRISES, INC. (Parent Company) STATEMENTS OF INCOME Year ended December 31, - ------------------------------------------------------------------------------ 1995 1994 1993 - ------------------------------------------------------------------------------ (Dollars in thousands) REVENUES $ 5,608 6,190 5,860 - ------------------------------------------------------------------------------ EXPENSES Operating expenses 5,165 5,400 6,014 Depreciation and amortization 6,860 6,603 5,877 - ------------------------------------------------------------------------------ Total expenses 12,025 12,003 11,891 - ------------------------------------------------------------------------------ OPERATING LOSS (6,417) (5,813) (6,031) - ------------------------------------------------------------------------------ OTHER INCOME (EXPENSE) Interest expense (37,467) (34,463) (20,678) Interest income 30,930 24,088 10,696 - ------------------------------------------------------------------------------ Total other income (expense) (6,537) (10,375) (9,982) - ------------------------------------------------------------------------------ LOSS BEFORE INCOME TAXES AND EQUITY IN SUBSIDIARIES' EARNINGS (12,954) (16,188) (16,013) Income tax benefit 3,769 3,205 5,037 - ------------------------------------------------------------------------------ LOSS BEFORE EQUITY IN SUBSIDIARIES' EARNINGS (9,185) (12,983) (10,976) Equity in subsidiaries' earnings 123,961 113,221 79,980 - ------------------------------------------------------------------------------ NET INCOME $ 114,776 100,238 69,004 ============================================================================== See accompanying notes to condensed financial information of registrant. SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (continued) CENTURY TELEPHONE ENTERPRISES, INC. (Parent Company) BALANCE SHEETS December 31, - ----------------------------------------------------------------------------- 1995 1994 - ----------------------------------------------------------------------------- (Dollars in thousands) ASSETS CURRENT ASSETS Cash and cash equivalents $ 1,616 3,097 Receivables from subsidiaries 94,217 126,821 Other receivables 9,888 941 Prepayments and other 1,854 844 - ---------------------------------------------------------------------------- Total current assets 107,575 131,703 - ---------------------------------------------------------------------------- PROPERTY, PLANT AND EQUIPMENT Property and equipment 983 932 Accumulated depreciation (583) (524) - ---------------------------------------------------------------------------- Net property, plant and equipment 400 408 - ---------------------------------------------------------------------------- INVESTMENTS AND OTHER ASSETS Investments in subsidiaries (at equity) 1,166,186 1,032,991 Receivables from subsidiaries 139,631 155,156 Other investments 50,620 27,919 Note receivable 22,500 24,167 Deferred charges 5,010 5,599 - ---------------------------------------------------------------------------- Total investments and other assets 1,383,947 1,245,832 - ---------------------------------------------------------------------------- TOTAL ASSETS $ 1,491,922 1,377,943 ============================================================================ LIABILITIES AND EQUITY CURRENT LIABILITIES Current maturities of long-term debt $ 5,516 5,481 Notes payable to banks - 158,000 Payables to subsidiaries 143,793 155,551 Accrued interest 4,424 7,345 Other accrued liabilities 4,377 11,420 - ---------------------------------------------------------------------------- Total current liabilities 158,110 337,797 - ---------------------------------------------------------------------------- LONG-TERM DEBT 392,018 342,334 - ---------------------------------------------------------------------------- PAYABLES TO SUBSIDIARIES 35,684 34,197 - ---------------------------------------------------------------------------- DEFERRED CREDITS AND OTHER LIABILITIES 17,686 13,379 - ---------------------------------------------------------------------------- STOCKHOLDERS' EQUITY Common stock, $1.00 par value, authorized 175,000,000 shares, issued and outstanding 59,113,670 and 53,574,361 shares 59,114 53,574 Paid-in capital 453,584 319,235 Retained earnings 387,424 291,999 Unearned ESOP shares (13,960) (16,840) Preferred stock - non-redeemable 2,262 2,268 - ---------------------------------------------------------------------------- Total stockholders' equity 888,424 650,236 - ---------------------------------------------------------------------------- TOTAL LIABILITIES AND EQUITY $ 1,491,922 1,377,943 ============================================================================ See accompanying notes to condensed financial information of registrant. SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued) CENTURY TELEPHONE ENTERPRISES, INC. (Parent Company) STATEMENTS OF CASH FLOWS <TABLE> <CAPTION> Year ended December 31, - ---------------------------------------------------------------------------------------------------- 1995 1994 1993 - ---------------------------------------------------------------------------------------------------- (Dollars in thousands) <S> <C> <C> <C> OPERATING ACTIVITIES Net income $ 114,776 100,238 69,004 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 6,860 6,603 5,877 Deferred income taxes 4,241 5,918 (451) Earnings of subsidiaries (123,961) (113,221) (79,980) Changes in current assets and current liabilities: (Increase) decrease in other receivables (8,947) 7,078 (6,692) Increase (decrease) in other accrued liabilities (3,409) 5,063 1,203 Changes in other current assets and other current liabilities, net (4,377) 6,014 102 Other, net 1,558 766 1,934 - ---------------------------------------------------------------------------------------------------- Net cash provided by (used in) operating activities (13,259) 18,459 (9,003) - ---------------------------------------------------------------------------------------------------- INVESTING ACTIVITIES Acquisitions (22,130) (55,979) (33,209) Capital contributions to subsidiaries (53,050) (47,516) (16,819) Dividends received from subsidiaries 52,423 3,841 908 (Increase) decrease in receivables from subsidiaries 71,203 (98,917) (13,024) Increase (decrease) in payables to subsidiaries (10,271) 70,512 23,848 Investment in unconsolidated personal communications services entity (20,000) - - Note receivable 833 (25,000) - Purchase of Industrial Development Revenue bonds - - (19,000) Other, net (2,546) (3,292) (2,893) - ----------------------------------------------------------------------------------------------------- Net cash provided by (used in) investing activities 16,462 (156,351) (60,189) - ----------------------------------------------------------------------------------------------------- FINANCING ACTIVITIES Proceeds from issuance of long-term debt 171,046 147,754 - Payments of long-term debt (4,901) (4,870) (6,697) Notes payable, net (158,000) 7,500 88,500 Proceeds from issuance of common stock 6,522 4,814 3,529 Cash dividends paid (19,351) (17,184) (15,735) - ---------------------------------------------------------------------------------------------------- Net cash provided by (used in)financing activities (4,684) 138,014 69,597 - ---------------------------------------------------------------------------------------------------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (1,481) 122 405 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 3,097 2,975 2,570 - ---------------------------------------------------------------------------------------------------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 1,616 3,097 2,975 ==================================================================================================== 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 (including sinking fund requirements) for the five years subsequent to December 31, 1995 are as follows: 1996 - $5.5 million 1997 - $5.0 million 1998 - $4.7 million 1999 - $4.3 million 2000 - $57.7 million (B) GUARANTEES As of December 31, 1995, Century has guaranteed a promissory note for a subsidiary of $2.6 million, as well as the applicable interest and premium. Century has also guaranteed $905,000 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 $52.4 million, $3.8 million and $908,000 during 1995, 1994 and 1993, respectively. (D) INCOME TAXES AND INTEREST PAID Income taxes paid by Century (including amounts reimbursed from subsidiaries) were $56.9 million, $35.0 million and $31.5 million during 1995, 1994 and 1993, respectively. Interest paid by Century was $40.4 million, $32.0 million and $20.9 million during 1995, 1994 and 1993, 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 $28.2 million, $22.2 million and $10.6 million in 1995, 1994 and 1993, respectively. SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS CENTURY TELEPHONE ENTERPRISES, INC. For the years ended December 31, 1995, 1994 and 1993 <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, 1995 Allowance for doubtful accounts $ 2,360 7,200 (6,946) 154 2,768 Year ended December 31, 1994 Allowance for doubtful accounts $ 1,473 4,748 (4,139) 278 2,360 Year ended December 31, 1993 Allowance for doubtful accounts $ 960 2,073 (1,810) 250 1,473 (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> CENTURY TELEPHONE ENTERPRISES, INC. INDEX TO EXHIBITS December 31, 1995 Exhibit Number - ------- 3(i) Amended and Restated Articles of Incorporation of Registrant, dated as of May 23, 1995 (incorporated by reference to Exhibit 4.1 to Registration No. 33-60061). 3(ii) Registrant's Bylaws, as amended through May 23, 1995 (incorporated by reference to Exhibit 4.2 to Registration No. 33-60061). 4.1 Competitive Advance and Revolving Credit Facility Agreement, dated October 17, 1995, between Registrant and Bank One of Texas, N.A. (incorporated by reference to Exhibit 4.2 to Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1995). 4.2 Note Purchase Agreement, dated September 1, 1989, between Registrant, Teachers Insurance and Annuity Association of America and the Lincoln National Life Insurance Company (incorporated by reference to Exhibit 4.23 to Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1989). 4.12 Amended and Restated Rights Agreement dated as of November 17, 1986 between Century Telephone Enterprises, Inc. and the Rights Agent named therein (incorporated by reference to Exhibit 4.1 to Registrant's Current Report on Form 8-K dated December 20, 1988), the Amendment thereto dated March 26, 1990 (incorporated by reference to Exhibit 4.1 to Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 1990) and the Second Amendment thereto dated February 23, 1993 (incorporated by reference to Exhibit 4.12 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1992). 4.16 Note Purchase Agreement, dated May 6, 1986, among Registrant, Teachers Insurance and Annuity Association of America, Aetna Life Insurance Company, the Aetna Casualty and Surety Company and Lincoln National Pension Insurance Company (incorporated by reference to Exhibit 4.23 to Registration No. 33-5836), Amendatory Agreement dated November 1, 1986 (incorporated by reference to Exhibit 4.2 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1986), amendment thereto dated November 1, 1987 (incorporated by reference to Exhibit 4.2 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1987) and Modification Letter dated September 1, 1989 (incorporated by reference to Exhibit 19.6 to Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1989). 4.22 Form of common stock certificate of the Registrant (incorporated by reference to Exhibit 4.1 to Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1993). 4.24 Revolving Credit Facility Agreement, dated February 7, 1992 between Registrant and NationsBank of Texas, N.A. (incorporated by reference to Exhibit 4.24 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1991), amendment thereto dated April 8, 1993 (incorporated by reference to Exhibit 19.2 to Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 1993), amendment thereto dated July 9, 1993 (incorporated by reference to Exhibit 4.24 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1993), amendment thereto dated August 15, 1994 (incorporated by reference to Exhibit 4.1 to Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1994) and amendment thereto dated October 5, 1995 (incorporated by reference to Exhibit 4.1 to Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1995). 4.25 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). 4.26 Resolutions adopted by the Executive Committee of the Board of Directors on April 29, 1994 designating the terms and conditions of the Company's 7-3/4% Senior Notes, Series A, due 2004 and 8-1/4% Senior Notes, Series B, due 2024 ("Senior Notes") (incorporated by reference to Exhibit 4.1 to Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 1994). 4.27 Resolutions adopted by the Special Pricing Committee of the Board of Directors on November 27, 1995 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"), included herein. 4.28 Form of Senior Notes (incorporated by reference to Exhibit 4.3 of the Company's Registration Statement on Form S-3, Registration No. 33-52915). 10.1 Employee Benefit Plans (a) Registrant's Employee Stock Ownership Plan and Trust, as amended and restated December 30, 1994 (incorporated by reference to Exhibit 10.1 to Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 1995) and amendment thereto dated January 26, 1996, included herein. (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) and amendment thereto dated January 26, 1996, included herein. (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). (d) Registrant's Restated Supplemental Executive Retirement Plan, generally effective as of November 16, 1995, included herein. (e) Registrant's 1983 Restricted Stock Plan, dated February 21, 1984, as amended and restated as of November 16, 1995, included herein. (f) Registrant's Key Employee Incentive Compensation Plan, dated January 1, 1984, as amended and restated as of November 16, 1995, included herein. (g) Registrant's 1988 Incentive Compensation Program as amended and restated August 22, 1989 (incorporated by reference to Exhibit 19.8 to Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1989). (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). (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). (m) Form of Stock Option Agreement, pursuant to 1995 Incentive Compensation Plan and dated as of May 22, 1995, entered into by Registrant and its officers (incorporated by reference to Exhibit 10.5 to Registrant's Quarterly Report on From 10-Q for the quarter ended June 30, 1995). (n) Form of Stock Option Agreement, pursuant to 1995 Incentive Compensation Plan and dated as of June 23, 1995, entered into by Registrant and certain key employees (incorporated by reference to Exhibit 10.6 to Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1995). (o) Form of Performance Share Agreement Under the 1990 Incentive Compensation Program, entered into in 1993 with certain of its officers and employees (incorporated by reference to Exhibit 28.1 to Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 1993) and amendment thereto dated as of May 22, 1995 (incorporated by reference to Exhibit 10.3 to Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1995). (p) Form of Restricted Stock Agreement and Performance Share Agreement Under the 1988 Incentive Compensation Program, entered into in 1993 with certain of its officers and employees (incorporated by reference to Exhibit 28.2 to Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 1993) and amendment thereto dated as of May 22, 1995 (incorporated by reference to Exhibit 10.4 to Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1995). (q) Registrant's Restated Supplemental Defined Contribution Plan, dated as of November 16, 1995, included herein. (r) 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). (s) 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). (t) Registrant's Restated Outside Directors' Retirement Plan, dated as of November 16, 1995, included herein. (u) Registrant's Restated Deferred Compensation Plan for Outside Directors, dated as of November 16, 1995, included herein. 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, included herein. (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, included herein. (c) Form of Amended and Restated Severance Agreement, by and between Registrant and six of its officers who are not executive officers, dated as of November 16, 1995, included herein. (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). 10.3 Other Agreements (a) Agreement and Plan of Merger dated October 8, 1993, as amended by Amendment No. 1 thereto dated January 5, 1994 by and among Registrant, Celutel Acquisition Corp., Celutel, Inc. and the Principal Stockholders of Celutel, Inc. (incorporated by reference to Appendix I of Registrant's Prospectus forming a part of its Registration Statement No. 33-50791 filed January 12, 1994 pursuant to Rule 424(b)(5)). (b) Loan Agreement and Grant of Rights of First Refusal to Acquire Assets and/or Capital Stock of MillTenn, Inc. and its Subsidiaries (incorporated by reference to Exhibit 10.1 to Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 1994). 11 Computations of Earnings Per Share, included herein. 21 Subsidiaries of the Registrant, included herein. 23 Independent Auditors' Consent, included herein. 27 Financial Data Schedule, included herein.