UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1994
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-6793
CENTRAL TELEPHONE COMPANY
(Exact name of registrant as specified in its charter)
DELAWARE 47-0533677
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
P.O. Box 11315, Kansas City, Missouri 64112
(Address of principal executive offices)
(913) 624-3000
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year, if changed
since last report)
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
SHARES OF COMMON STOCK OUTSTANDING AT March 31, 1994 -- 9,000,000
PART 1.
Item 1.
CENTRAL TELEPHONE COMPANY
CONSOLIDATED BALANCE SHEETS
(In Millions)
March 31, December 31,
1994 1993
(Unaudited)
Assets
Current assets
Cash $ 9.2 $ 9.5
Receivables
Customers and other, net of allowance
for doubtful accounts of $0.3 million
($0.6 million in 1993) 80.9 84.0
Interexchange carriers 26.9 23.7
Affiliated companies 20.2 13.9
Advances to affiliates 20.2 3.3
Deferred income taxes 13.4 19.8
Prepaid expenses and other 11.0 13.2
Total current assets 181.8 167.4
Property, plant and equipment
Land and buildings 116.8 116.4
Telephone network equipment and outside
plant 2,173.3 2,150.1
Other 139.1 138.8
Construction in progress 30.2 13.9
2,459.4 2,419.2
Less accumulated depreciation (973.2) (943.7)
1,486.2 1,475.5
Deferred charges and other assets 78.4 80.7
$ 1,746.4 $ 1,723.6
See accompanying notes to consolidated financial statements.
PART 1.
Item 1.
CENTRAL TELEPHONE COMPANY
CONSOLIDATED BALANCE SHEETS (continued)
(In Millions)
March 31, December 31,
1994 1993
(Unaudited)
Liabilities and Stockholder's Equity
Current liabilities
Outstanding checks in excess of cash
balances $ 22.8 $ 17.5
Current maturities of long-term debt 22.0 22.7
Advances from affiliates 28.0 14.4
Accounts payable
Vendors and other 24.3 17.6
Interexchange carriers 33.6 32.2
Affiliated companies 25.6 32.2
Accrued merger, integration and
restructuring costs 15.4 24.3
Accrued interest 11.3 17.2
Advance billings 16.4 16.2
Accrued vacation pay 13.6 15.2
Other 48.0 42.7
Total current liabilities 261.0 252.2
Long-term debt 471.4 440.9
Deferred credits and other liabilities
Deferred income taxes and investment tax
credits 270.6 276.4
Postretirement benefits obligations 76.9 71.6
Regulatory liability 56.2 59.1
Other 20.6 15.1
424.3 422.2
Redeemable preferred stock 9.0 9.0
Common stock and other stockholder's
equity
Common stock, no par value, authorized -
10.0 million shares, issued and
outstanding - 9.0 million shares 354.4 354.4
Retained earnings 226.3 244.9
580.7 599.3
$ 1,746.4 $ 1,723.6
See accompanying notes to consolidated financial statements.
PART I.
Item 1.
CENTRAL TELEPHONE COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Millions)
(Unaudited)
Three Months
Ended
March 31,
1994 1993
Operating revenues
Local service $ 109.1 $ 99.5
Toll and access service 88.4 81.1
Other 25.1 24.3
222.6 204.9
Operating expenses
Plant operations 73.9 75.4
Depreciation and amortization 33.4 32.8
Other 66.4 66.2
Merger, integration and restructuring costs -- 68.5
Total operating expenses 173.7 242.9
Operating income (loss) 48.9 (38.0)
Interest expense (8.7) (11.2)
Other income (expense), net 0.3 (0.2)
Income (loss) before income taxes and
cumulative effect of changes in accounting
principles 40.5 (49.4)
Income tax (provision) benefit (13.7) 20.5
Income (loss) before cumulative effect of
changes in accounting principles 26.8 (28.9)
Cumulative effect of changes in accounting
principles, net (1.6) (21.7)
Net income (loss) 25.2 (50.6)
Preferred stock dividends (0.1) (0.1)
Earnings (loss) applicable to common stock $ 25.1 $ (50.7)
Pro forma amounts assuming the change in
accounting for software costs was
retroactively applied
Net loss $ -- $ (28.9)
See accompanying notes to consolidated financial statements.
PART I.
Item 1.
CENTRAL TELEPHONE COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Millions)
(Unaudited)
Three Months Ended
March 31,
1994 1993
Operating activities
Net income (loss) $ 25.2 $ (50.6)
Adjustments to reconcile net income (loss)
to net cash provided by operating
activities
Depreciation and amortization 33.4 32.8
Cumulative effect of changes in accounting
principles 1.6 21.7
Deferred income taxes and investment tax
credits (0.7) (16.0)
Changes in operating assets and liabilities
Receivables, net (6.4) 6.6
Other current assets 2.2 2.1
Accounts payable, accrued expenses and other
current liabilities (4.1) 30.1
Noncurrent assets and liabilities, net 10.0 32.6
Other, net (0.1) 8.2
Net cash provided by operating activities 61.1 67.5
Investing activities
Capital expenditures (44.2) (44.1)
(Increase) decrease in advances to
affiliates (16.9) 6.5
Other, net 0.2 (1.0)
Net cash used by investing activities (60.9) (38.6)
Financing activities
Retirements of long-term debt (0.4) (26.0)
Increase in short-term borrowings 30.0 4.9
Increase in advances from affiliates 13.6 2.3
Dividends paid (43.8) (10.1)
Other, net 0.1 (0.1)
Net cash used by financing activities (0.5) (29.0)
Decrease in cash (0.3) (0.1)
Cash at beginning of period 9.5 7.3
Cash at end of period $ 9.2 $ 7.2
See accompanying notes to consolidated financial statements.
PART I.
Item 1.
CENTRAL TELEPHONE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1994 and 1993
(Unaudited)
The information contained in this Form 10-Q for the three-month
interim periods ended March 31, 1994 and 1993 reflects all
adjustments, consisting only of normal recurring and certain
nonrecurring accruals (see Note 2), which are, in the opinion of
management, necessary to a fair statement of the operations for
such interim periods.
1. Accounting Policies
Basis of Presentation
The accompanying consolidated financial statements include the
accounts of Central Telephone Company and its wholly-owned
subsidiaries, Central Telephone Company of Florida, Central
Telephone Company of Virginia and Central Telephone Company of
Illinois (the Company). All significant intercompany transactions
have been eliminated. The Company is a wholly-owned subsidiary of
Centel Corporation (Centel); accordingly, earnings per share
information has been omitted. Centel became a wholly-owned
subsidiary of Sprint Corporation (Sprint) on March 9, 1993, in
connection with the Sprint/Centel merger (See Note 2).
The Company accounts for the economic effects of regulation
pursuant to Statement of Financial Accounting Standards (SFAS) No.
71, "Accounting for the Effects of Certain Types of Regulation,"
which requires the accounting recognition of the rate actions of
regulators where appropriate. Such actions can provide reasonable
assurance of the existence of an asset, reduce or eliminate the
value of an asset, or impose a liability on a regulated enterprise.
Postretirement Benefits
Effective January 1, 1993, the Company modified its accrual method
of accounting for postretirement benefits (principally health care
and life insurance benefits) provided to certain retirees by
adopting SFAS No. 106, "Employers' Accounting for Postretirement
Benefits Other Than Pensions." As permitted by SFAS No. 106, the
Company elected to recognize its previously unrecognized obligation
for postretirement benefits as of January 1, 1993 by amortizing
such obligation on a straight-line basis generally over a period of
20 years, except in those jurisdictions where shorter amortization
periods have been authorized for regulatory treatment.
Postemployment Benefits
Effective January 1, 1994, the Company adopted SFAS No. 112,
"Employers' Accounting for Postemployment Benefits." Upon
adoption, the Company recognized certain previously unrecorded
obligations for benefits to be provided to former or inactive
employees and their dependents, after employment but before
retirement. Such postemployment benefits offered by the Company
include severance, disability, and workers' compensation benefits,
including the continuation of other benefits such as health care
and life insurance coverage.
The resulting nonrecurring, noncash charge of $2 million, net of
related income tax benefits, is reflected in the 1994 consolidated
statement of operations as a cumulative effect of change in
accounting principle. Adoption of SFAS No. 112 is not expected to
significantly impact future operating expenses.
Software Costs
Effective January 1, 1993, the Company changed its method of
accounting for certain software costs. The change was made to
conform the Company's accounting to the predominant practice among
local exchange carriers. Under the new method, such costs are
being expensed when incurred. The resulting nonrecurring, noncash
charge of $22 million, net of related income tax benefits of $13
million, is reflected as a change in accounting principle in the
1993 consolidated statement of operations.
Reclassifications
Certain amounts in the accompanying consolidated financial
statements for 1993 have been reclassified to conform to the
presentation of amounts in the 1994 consolidated financial
statements. These reclassifications had no effect on the results
of operations.
2. Sprint/Centel Merger
Effective March 9, 1993, Centel and Sprint consummated a merger of
the companies. Sprint is a diversified telecommunications company
with local exchange telephone operations in seventeen states prior
to the merger, including Florida, North Carolina and Virginia. The
transaction costs associated with the merger (consisting primarily
of investment banking and legal fees) and the estimated expenses of
integrating and restructuring the operations of the two companies
(consisting primarily of employee severance and relocation expenses
and costs of eliminating duplicative facilities) resulted in a
nonrecurring charge to Sprint during 1993. The portion of such
charge attributable to the Company during 1993 was $77 million, of
which $69 million was recorded during the 1993 first quarter. This
nonrecurring charge reduced net income for the 1993 first quarter
by $44 million.
3. Income Taxes
The differences which cause the effective income tax rate to vary
from the statutory federal income tax rate of 35 percent and 34
percent for the three months ended March 31, 1994 and 1993,
respectively, are as follows (in millions):
Three Months Ended
March 31,
1994 1993
Income tax (provision) benefit at the
applicable statutory income tax rate $ (14.2) $ 16.8
Effect of:
Investment tax credits included in income 0.5 0.6
State income taxes, net of federal income
tax effect (0.6) 0.7
Reversal of rate differentials 0.4 0.4
Other, net 0.2 2.0
Income tax (provision) benefit, including
investment tax credit $ (13.7) $ 20.5
Effective income tax rate 34% 41%
On August 10, 1993, the Revenue Reconciliation Act of 1993 was
enacted which, among other changes, raised the federal income tax
rate for corporations to 35 percent from 34 percent, retroactive to
January 1, 1993. Accordingly, upon enactment, the Company adjusted
its deferred income tax assets and liabilities to reflect the
revised rate. Pursuant to SFAS No. 71, the resulting adjustments
were generally reflected as reductions to the related regulatory
liabilities.
4. Supplemental Cash Flows Information
Three Months Ended
March 31,
1994 1993
Cash paid for (in millions):
Interest $ 14.7 $ 12.4
Income taxes $ 1.6 $ 4.2
PART I.
Item 2.
CENTRAL TELEPHONE COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Sprint/Centel Merger
Effective March 9, 1993, Centel Corporation (Centel), the parent
company of Central Telephone Company, and Sprint Corporation
(Sprint) consummated a merger of the companies. Sprint is a
diversified telecommunications company with local exchange
telephone operations in seventeen states prior to the merger,
including Florida, North Carolina and Virginia.
The operations of the merged companies continue to be integrated
and restructured to achieve efficiencies which are yielding
operational synergies and cost savings. The transaction costs
associated with the merger (consisting primarily of investment
banking and legal fees) and the estimated expenses of integrating
and restructuring the operations of the two companies (consisting
primarily of employee severance and relocation expenses and costs
of eliminating duplicative facilities) resulted in a nonrecurring
charge to Sprint during 1993. The portion of such charge
attributable to the Company during 1993 was $77 million, of which
$69 million was recorded during the 1993 first quarter. This
nonrecurring charge reduced net income for the 1993 first quarter
by $44 million.
Liquidity and Capital Resources
Cash flows from operating activities, which are the Company's
primary source of liquidity, were $61 million during the first
three months of 1994 compared to $68 million during the first three
months of 1993. The decrease in operating cash flows reflects
payments associated with the merger, integration and restructuring
actions and increases in affiliated accounts receivable.
The Company's investing activities used cash of $61 million and $39
million during the first three months of 1994 and 1993,
respectively. The increase in cash used for investing activities
was due to increases in advances to affiliates. Capital
expenditures, which represent the Company's most significant
investing activity, were $44 million during the first three months
of 1994 and 1993. Capital expenditures were made to accommodate
access line growth and to expand the capabilities for providing
enhanced telecommunications services.
Financing activities used cash of $1 million in the first three
months of 1994 and $29 million in the comparable 1993 period. Long-
term debt retirements during the first three months of 1993 include
the redemption of $25 million of debt prior to scheduled
maturities.
As of March 31, 1994, the Company's total capitalization aggregated
$1.11 billion, consisting of long-term debt (including current
maturities), advances from affiliates, redeemable preferred stock,
and common stock and other stockholder's equity. Long-term debt
(including current maturities and advances from affiliates)
comprised 47 percent of total capitalization as of March 31, 1994
compared to 44 percent at year-end 1993.
During 1994, the Company anticipates funding estimated capital
expenditures of $190 million with cash flows from operating
activities. The Company continues to expect its external cash
requirements for 1994 to be approximately $12 million which is
generally required to pay scheduled long-term debt maturities. The
method of financing the cash requirements will depend on prevailing
market conditions during the year. The Company may also undertake
debt refinancings during 1994 in order to take advantage of
favorable interest rates.
Results of Operations
Net operating revenues increased 9 percent in the first quarter of
1994 over the comparable 1993 period. Local service revenues,
derived from providing local exchange telephone service, increased
10 percent in the first quarter of 1994 over the comparable 1993
period. This increase reflects continued growth in the number of
access lines served, add-on services, such as custom calling, and
increased Centrex revenues. The number of access lines served grew
5.5 percent during the past twelve months.
Toll and access service revenues, derived from interexchange long
distance carriers use of the local network to complete calls and
the provision of long distance services within specified
geographical areas, increased $7 million during the first quarter
of 1994 relative to the comparable 1993 period as a result of
increased traffic volumes and election of the price caps regulatory
format effective July 1, 1993. Toll and access service revenues
for the 1993 first quarter also include a portion of the merger,
integration and restructuring costs which were recognized for
regulatory purposes in certain jurisdictions.
Exclusive of the merger, integration and restructuring costs,
operating expenses decreased $1 million in the first quarter of
1994 from the comparable 1993 period. The decrease is primarily
due to operational synergies and cost savings due to the
Sprint/Centel merger. In addition, during the 1993 first quarter,
the Company recognized approximately $4 million of costs in
connection with voluntary separation plans offered to certain
employees. These decreases are partially offset by increases
within plant operations expense related to the costs of providing
services resulting from access line growth and increases within
other expense related to increased marketing costs.
Interest expense was $9 million and $11 million in the first
quarter of 1994 and 1993, respectively. The decrease in the first
quarter of 1994 was generally related to a decrease in average
levels of debt outstanding and lower interest rates.
The Company's income tax provisions for the first quarter of 1994
and 1993 resulted in effective tax rates of 34 percent and 41
percent, respectively. See Note 3 of "Notes to Consolidated
Financial Statements" for information regarding the differences
that cause the effective income tax rates to vary from the
statutory federal income tax rates.
Regulatory Activities
In June 1993, the Company's Illinois subsidiary filed with the
Illinois Commerce Commission a petition to adjust its rates and
charges such that annual intrastate revenues would increase by
approximately $10 million. This rate proceeding was required to
provide revenue recovery for the added costs related to the
adoption of Statement of Financial Accounting Standards (SFAS) No.
106 and to recognize the phases of the Federal Communications
Commission mandated jurisdictional cost shifts from interstate to
intrastate. A final order was issued in May 1994, increasing
annual intrastate revenues by approximately $6 million.
Other Matters
Effective January 1, 1994, the Company adopted SFAS No. 112,
"Employers' Accounting for Postemployment Benefits." The
cumulative effect of this change in accounting principle resulted
in a charge of $2 million, net of related income tax benefits.
Consistent with most local exchange carriers, the Company accounts
for the economic effects of regulation pursuant to SFAS No. 71,
"Accounting for the Effects of Certain Types of Regulation." The
application of SFAS No. 71 requires the accounting recognition of
the rate actions of regulators where appropriate, including the
recognition of depreciation and amortization based on estimated
useful lives prescribed by regulatory commissions rather than those
which might be utilized by non-regulated enterprises. Management
believes the Company's operations meet the criteria for the
continued application of the provisions of SFAS No. 71. With
increasing competition and the changing nature of regulation in the
telecommunications industry, the ongoing applicability of SFAS No.
71 must, however, be constantly monitored and evaluated. Should
the Company no longer qualify for the application of the provisions
of SFAS No. 71 at some future date, the accounting impact could
result in the recognition of a material, extraordinary, noncash
charge.
PART II.
Other Information
Item 1. Legal Proceedings
There were no reportable events during the quarter ended March
31, 1994.
Item 2. Changes in Securities
There were no reportable events during the quarter ended March
31, 1994.
Item 3. Defaults Upon Senior Securities
There were no reportable events during the quarter ended March
31, 1994.
Item 4. Submission of Matters to a Vote of Security Holders
There were no reportable events during the quarter ended March
31, 1994.
Item 5. Other Information
The Company's ratios of earnings to fixed charges were 4.82
and (2.77) for the three months ended March 31, 1994 and 1993,
respectively. These ratios have been computed by dividing
fixed charges into the sum of (a) income (loss) before
cumulative effect of changes in accounting principles,
(b) income taxes, and (c) fixed charges. Fixed charges
consist of interest on all indebtedness (including amortization
of debt issuance expenses), the interest factor of operating
rents and the pre-tax cost of preferred stock dividends of
subsidiaries. In the absence of the nonrecurring merger, integration
and restructuring costs of $69 million recorded during the three
months ended March 31, 1993, the ratio of earnings to fixed
charges would have been 2.46.
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibit is filed as part of this report:
(12) Computation of ratio of earnings to fixed
charges.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the quarter ended
March 31, 1994.
SIGNATURE
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.
CENTRAL TELEPHONE COMPANY
(Registrant)
/s/ Ralph J. Hodge
Ralph J. Hodge
Vice President - Controller
Dated: May 13, 1994
EXHIBIT INDEX
EXHIBIT
NUMBER
(12) Computation of Ratio of Earnings to Fixed Charges.
EXHIBIT (12)
CENTRAL TELEPHONE COMPANY
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(In Millions)
(Unaudited)
Three Months Ended
March 31,
1994 1993
Income (loss) before cumulative effect
of changes in accounting principles $ 26.8 $ (28.9)
Income tax provision (benefit) 13.7 (20.5)
Subtotal 40.5 (49.4)
Fixed charges
Interest charges 8.7 11.2
Interest factor of operating rents 1.8 1.8
Pre-tax cost of preferred stock
dividends of subsidiaries 0.1 0.1
Total fixed charges 10.6 13.1
Earnings (loss), as adjusted $ 51.1 $ (36.3)
Ratio of earnings (loss) to fixed 4.82 (2.77)
charges
(1) Earnings as computed for the ratio of earnings to fixed
charges were inadequate to cover fixed charges for the three
months ended March 31, 1993. The amount of the coverage
deficiency was $49.4 million. Earnings as computed for the ratio
of earnings to fixed charges includes the nonrecurring merger,
integration and restructuring costs of $68.5 million recorded in
first quarter 1993. In the absence of the merger, integration
and restructuring costs, the ratio of earnings to fixed charges
would have been 2.46 for first quarter 1993.
NOTE: The above ratios have been computed by dividing fixed
charges into the sum of (a) income (loss) before cumulative effect
of changes in accounting principles, (b) income taxes, and (c)
fixed charges. Fixed charges consist of interest on all
indebtedness (including amortization of debt issuance expenses),
the interest component of operating rents and the pretax cost of
preferred stock dividends of subsidiaries.
