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 September 30, 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 SEPTEMBER 30, 1994 -- 9,000,000
PART 1.
Item 1.
CENTRAL TELEPHONE COMPANY
CONSOLIDATED BALANCE SHEETS
(In Millions)
September December
30, 1994 31, 1993
(Unaudited)
Assets
Current assets
Cash $ 13.5 $ 9.5
Receivables
Customers and other, net of allowance
for doubtful accounts of $0.6 million
in 1993 89.1 84.0
Interexchange carriers 30.9 23.7
Affiliated companies 11.4 13.9
Advances to affiliates 36.4 3.3
Deferred income taxes 5.9 19.8
Prepaid expenses and other 14.5 13.2
Total current assets 201.7 167.4
Property, plant and equipment
Land and buildings 118.8 116.4
Telephone network equipment and outside
plant 2,240.2 2,150.1
Other 153.0 138.8
Construction in progress 42.5 13.9
2,554.5 2,419.2
Less accumulated depreciation (1,027.0) (943.7)
1,527.5 1,475.5
Deferred charges and other assets 72.7 80.7
$ 1,801.9 $ 1,723.6
See accompanying condensed notes to consolidated financial statements.
PART 1.
Item 1.
CENTRAL TELEPHONE COMPANY
CONSOLIDATED BALANCE SHEETS (continued)
(In Millions)
September December
30, 1994 31, 1993
(Unaudited)
Liabilities and Stockholders' Equity
Current liabilities
Outstanding checks in excess of cash
balances $ 17.6 $ 17.5
Current maturities of long-term debt 3.9 22.7
Advances from affiliates 71.9 14.4
Accounts payable
Vendors and other 27.9 17.6
Interexchange carriers 31.1 32.2
Affiliated companies 28.4 32.2
Accrued merger, integration and
restructuring costs 3.4 24.3
Accrued interest 9.8 17.2
Advance billings 17.0 16.2
Accrued vacation pay 13.3 15.2
Accrued taxes 17.1 7.3
Other 26.0 35.4
Total current liabilities 267.4 252.2
Long-term debt 505.0 440.9
Deferred credits and other liabilities
Deferred income taxes and investment tax
credits 262.0 276.4
Postretirement benefits obligations 80.5 71.6
Regulatory liability 50.1 59.1
Other 31.5 15.2
424.1 422.3
Redeemable preferred stock 6.8 6.9
Common stock and other stockholders' equity
Common stock, no par value, authorized -
10.0 million shares, issued and
outstanding - 9.0 million shares 354.4 354.4
Non-redeemable preferred stock 2.0 2.0
Retained earnings 242.2 244.9
598.6 601.3
$ 1,801.9 $ 1,723.6
See accompanying condensed notes to consolidated financial statements.
PART I.
Item 1.
CENTRAL TELEPHONE COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Millions)
(Unaudited)
Three Months Nine Months
Ended Ended
September 30, September 30,
1994 1993 1994 1993
Operating revenues
Local service $ 115.3 $ 106.1 $ 336.8 $ 309.5
Toll and access service 93.7 86.1 267.2 252.6
Other 28.6 26.7 80.1 77.1
237.6 218.9 684.1 639.2
Operating expenses
Plant operations 77.6 70.1 225.3 216.3
Depreciation and amortization 34.5 32.4 102.9 98.3
Customer operations 38.3 32.5 107.0 100.4
Other 36.8 31.8 105.0 93.6
Merger, integration and
restructuring costs -- 4.7 -- 73.2
Total operating expenses 187.2 171.5 540.2 581.8
Operating income 50.4 47.4 143.9 57.4
Interest expense (10.0) (11.2) (28.5) (33.5)
Other income, net 1.1 0.4 2.4 0.2
Income before income taxes and
cumulative effect of changes
in accounting principles 41.5 36.6 117.8 24.1
Income tax provision (14.2) (11.9) (39.9) (3.3)
Income before extraordinary
item and cumulative effect of
changes in accounting
principles 27.3 24.7 77.9 20.8
Extraordinary losses on early
extinguishments of debt -- (3.8) -- (3.8)
Cumulative effect of changes in
accounting principles, net -- -- (1.6) (21.6)
Net income (loss) 27.3 20.9 76.3 (4.6)
Preferred stock dividends (0.2) (0.1) (0.4) (0.4)
Earnings (loss) applicable to
common stock $ 27.1 $ 20.8 $ 75.9 $ (5.0)
Pro forma amounts assuming the
change in accounting for
software costs was
retroactively applied
Net income $ -- $ 20.9 $ -- $ 17.0
See accompanying condensed notes to consolidated financial statements.
PART I.
Item 1.
CENTRAL TELEPHONE COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Millions)
(Unaudited)
Nine Months Ended
September 30,
1994 1993
Operating activities
Net income (loss) $ 76.3 $ (4.6)
Adjustments to reconcile net income (loss)
to net cash provided by operating
activities
Depreciation and amortization 102.9 98.3
Cumulative effect of changes in accounting
principles -- 21.6
Deferred income taxes and investment tax
credits (8.2) (18.0)
Changes in operating assets and liabilities
Receivables, net (7.1) (2.3)
Other current assets (1.3) 3.4
Accounts payable, accrued expenses and other
current liabilities (23.6) 29.7
Noncurrent assets and liabilities, net 31.9 21.0
Other, net (1.6) 17.5
Net cash provided by operating activities 169.3 166.6
Investing activities
Capital expenditures (154.3) (121.8)
Increase in advances to affiliates (33.1) (45.2)
Other, net (1.5) 2.2
Net cash used by investing activities (188.9) (164.8)
Financing activities
Proceeds from long-term debt -- 117.7
Retirements of long-term debt (21.9) (95.2)
Increase (decrease) in notes payable 67.0 (20.0)
Increase in advances from affiliates 57.5 6.2
Dividends paid (79.0) (10.4)
Other, net -- (0.3)
Net cash provided (used) by financing
activities 23.6 (2.0)
Increase (decrease) in cash 4.0 (0.2)
Cash at beginning of period 9.5 7.3
Cash at end of period $ 13.5 $ 7.1
See accompanying condensed notes to consolidated financial statements.
PART I.
Item 1.
CENTRAL TELEPHONE COMPANY
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The information contained in this Form 10-Q for the three and nine-
month interim periods ended September 30, 1994 and 1993 has been
prepared in accordance with instructions to Form 10-Q and Rule 10-
01 of Regulation S-X. In the opinion of management, all
adjustments considered necessary, consisting only of normal
recurring and certain nonrecurring accruals (see Note 2), to
present fairly the consolidated financial position, results of
operations, and cash flows for such interim periods have been made.
Certain information and footnote disclosures normally included in
consolidated financial statements prepared in accordance with
generally accepted accounting principles (GAAP) have been condensed
or omitted. The results of operations for the nine months ended
September 30, 1994 are not necessarily indicative of the operating
results that may be expected for the year ended December 31, 1994.
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 previously reported for prior periods have been
reclassified to conform to the current period presentation in the
accompanying consolidated financial statements. Such
reclassifications had no effect on the results of operations or
shareholders' equity as previously reported.
2. Sprint/Centel Merger
Effective March 9, 1993, Centel and Sprint consummated a merger of
the companies. Sprint is a diversified telecommunications company
which had 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 companies (consisting primarily of employee severance and
relocation expenses and costs of eliminating duplicative
facilities) resulted in a nonrecurring charge to Sprint during
1993, a portion of which was attributable to the Company. Accordingly,
during the three and nine-month periods ended September 30,
1993, charges of $5 million and $73 million, respectively,
associated with the continuing integration and restructuring
efforts, were recognized by the Company. Such nonrecurring charges
reduced net income by $3 million and $38 million for the three and
nine-month periods ended September 30, 1993, respectively.
3. Income Taxes
The differences which cause the effective income tax rate to vary
from the statutory federal income tax rate of 35 percent for the
nine months ended September 30, 1994 and 1993, are as follows (in
millions):
Nine Months Ended
September 30,
1994 1993
Income tax provision at the statutory rate $ 41.2 $ 8.4
Effect of:
Investment tax credits included in income (3.2) (3.4)
State income taxes, net of federal income
tax effect 3.6 0.8
Reversal of rate differentials (2.7) (2.7)
Other, net 1.0 0.2
Income tax provision, including investment
tax credits $ 39.9 $ 3.3
Effective income tax rate 33.9% 13.7%
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
Nine Months Ended
September 30,
1994 1993
Cash paid for (in millions):
Interest $ 34.0 $ 32.2
Income taxes $ 36.5 $ 13.7
PART I.
Item 2.
CENTRAL TELEPHONE COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Liquidity and Capital Resources
Cash flows from operating activities, which are the Company's
primary source of liquidity, were $169 million during the first
nine months of 1994 compared to $167 million during the first nine
months of 1993. The increase in operating cash flows reflects
improved operating results partially offset by decreases in merger-
related liabilities.
The Company's investing activities used cash of $189 million and
$165 million during the first nine months of 1994 and 1993,
respectively. The increase in cash used for investing activities
was due to increases in capital expenditures, partially offset by
decreases in amounts advanced to affiliates. Capital expenditures,
which represent the Company's most significant investing activity,
were made to accommodate access line growth and to expand the
capabilities for providing enhanced telecommunications services.
The Company estimates that 1994 capital expenditures for the year
will be $186 million.
Financing activities provided cash of $24 million in the first nine
months of 1994 and used cash of $2 million in the comparable 1993
period. During the first nine months of 1993, a significant level
of debt refinancing occurred to take advantage of lower interest
rates. Notes payable borrowings increased $67 million during the
first nine months of 1994 and decreased $20 million during the
first nine months of 1993. Increased dividends paid in the first
nine months of 1994 were partially offset by an increase in
advances from affiliates.
Regulatory Activities
In June 1993, the Company's Illinois subsidiary filed with the
Illinois Commerce Commission a petition to adjust its rates and
charges 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. An order was issued in May 1994, increasing annual
local service revenues by approximately $6 million. This order was
appealed to the Illinois Appellate Court by petitioners
representing consumers. The Company's Illinois subsidiary
subsequently filed a rate structure modification with the Illinois
Commerce Commission to reduce annual revenues by approximately $3
million, effective in October 1994. The appeal of the initial
order is still pending.
The Illinois Commerce Commission has granted each of MFS Intelenet
of Illinois, Inc. and TC Systems - Illinois, Inc. a Certificate of
Service Authority to provide local exchange services to customers
located in portions of the Chicago metropolitan area served by
Illinois Bell Telephone Company and the Company's Illinois
subsidiary.
Results of Operations
Net operating revenues increased 9 percent and 7 percent in the
third quarter and first nine months of 1994, respectively, over the
comparable 1993 periods. Local service revenues, derived from
providing local exchange telephone service, increased 9 percent in
both the third quarter and first nine months of 1994, respectively,
over the comparable 1993 periods. These increases reflect
continued growth in the number of access lines served and add-on
services, such as custom calling. The number of access lines
served grew 6 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 9 percent and 6 percent during the
third quarter and first nine months of 1994 relative to the
comparable 1993 periods. Toll and access service revenues were
impacted by increased traffic volumes and election of the price
caps regulatory format effective July 1, 1993. These revenues for
the first nine months of 1993 also included a portion of the
merger, integration and restructuring costs which were recognized
for regulatory purposes in certain jurisdictions. Annual access
rate filings became effective July 1, 1994. Such filings resulted
in decreased access rates; however, the impact of such decreases
were not material.
Exclusive of the merger, integration and restructuring costs,
operating expenses increased $20 million and $32 million in the
third quarter and first nine months of 1994, respectively, from the
comparable 1993 periods. Among the factors contributing to these
increases were higher plant operations expense related to the
costs of providing services resulting from access line growth, and
increases in other expense related to increased marketing and
customer service costs. These increases were partially offset by
decreases resulting from operational synergies and cost savings due
to the Sprint/Centel merger. In addition, the Company recognized
approximately $4 million of costs in connection with voluntary
separation plans offered to certain employees during the quarter
ended March 31, 1993.
Interest expense decreased $1 million and $5 million in the third
quarter and first nine months of 1994, respectively, from the
comparable 1993 periods. The decrease was generally related to
lower interest rates achieved through refinancing activities.
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.
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 LECs, 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 that might
be utilized by non-regulated enterprises. The Company currently
believes that its operations meet the criteria for the continued
application of the provisions of SFAS No. 71. However, the Company
operates in an evolving environment in which the regulatory
framework is changing and the level of competition is increasing.
Accordingly, the Company constantly monitors and evaluates the
ongoing applicability of SFAS No. 71 by assessing the likelihood
that prices which provide for the recovery of specific costs can
continue to be charged to customers. In the event the Company
determines that its operations no longer qualify for the
application of the provisions of SFAS No. 71, the Company would
eliminate from its financial statements the effects of any actions
of regulators that had been recognized as assets and liabilities,
resulting in the recognition of a material, extraordinary, noncash
charge, the amount of which is not known at the present time.
PART II.
Other Information
Item 1. Legal Proceedings
There were no reportable events during the quarter ended
September 30, 1994.
Item 2. Changes in Securities
There were no reportable events during the quarter ended
September 30, 1994.
Item 3. Defaults Upon Senior Securities
There were no reportable events during the quarter ended
September 30, 1994.
Item 4. Submission of Matters to a Vote of Security Holders
There were no reportable events during the quarter ended
September 30, 1994.
Item 5. Other Information
The Company's ratios of earnings to fixed charges were 4.88
and 3.75 for the three months ended and 4.56 and 1.61 for the
nine months ended September 30, 1994 and 1993, respectively.
These ratios have been computed by dividing fixed charges into
the sum of (a) income before extraordinary item and 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 $5 million and $73 million recorded
during the third quarter and first nine months of 1993, the
ratio of earnings to fixed charges would have been 4.11 and
3.45 for the three and nine months ended September 30, 1993.
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.
(27) Financial data schedule.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the quarter ended
September 30, 1994.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
CENTRAL TELEPHONE COMPANY
(Registrant)
/s/ Ralph J. Hodge
Ralph J. Hodge
Vice President - Controller
Dated: November 14, 1994
EXHIBIT INDEX
EXHIBIT
NUMBER
(12) Computation of ratio of earnings to fixed charges.
(27) Financial data schedule.
EXHIBIT (12)
CENTRAL TELEPHONE COMPANY
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(In Millions)
(Unaudited)
Three Months Nine Months
Ended Ended
September 30, September 30,
1994 1993 1994 1993
Income before
extraordinary item and
cumulative effect of
changes in accounting
principles $ 27.3 $ 24.7 $ 77.9 $ 20.8
Income tax provision 14.2 11.9 39.9 3.3
Subtotal 41.5 36.6 117.8 24.1
Fixed charges
Interest charges 10.0 11.2 28.5 33.5
Interest factor of
operating rents 0.4 2.0 4.1 5.7
Pre-tax cost of
preferred stock
dividends of
subsidiaries 0.3 0.1 0.5 0.5
Total fixed charges 10.7 13.3 33.1 39.7
Earnings, as adjusted $ 52.2 $ 49.9 $ 150.9 $ 63.8
Ratio of earnings to
fixed charges 4.88 3.75(1) 4.56 1.61(1)
(1) Earnings as computed for the ratio of earnings to fixed
charges includes the nonrecurring merger, integration and
restructuring costs of $5 million and $73 million recorded during
the third quarter and first nine months of 1993, respectively.
In the absence of the nonrecurring costs, the ratio of earnings
to fixed charges would have been 4.11 and 3.45 for the three and
nine months ended September 30, 1993, respectively.
NOTE: The above ratios have been computed by dividing fixed
charges into the sum of (a) income before extraordinary item and
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 pretax
cost of preferred stock dividends of subsidiaries.
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