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 June 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 JUNE 30, 1994 -- 9,000,000
PART 1.
Item 1.
CENTRAL TELEPHONE COMPANY
CONSOLIDATED BALANCE SHEETS
(In Millions)
June 30, December 31,
1994 1993
(Unaudited)
Assets
Current assets
Cash $ 10.7 $ 9.5
Receivables
Customers and other, net of allowance
for doubtful accounts of $0.2 million
($0.6 million in 1993) 84.0 84.0
Interexchange carriers 23.8 23.7
Affiliated companies 37.0 13.9
Advances to affiliates 13.0 3.3
Deferred income taxes 7.2 19.8
Prepaid expenses and other 10.6 13.2
Total current assets 186.3 167.4
Property, plant and equipment
Land and buildings 117.9 116.4
Telephone network equipment and outside
plant 2,206.1 2,150.1
Other 147.6 138.8
Construction in progress 46.6 13.9
2,518.2 2,419.2
Less accumulated depreciation (1,003.7) (943.7)
1,514.5 1,475.5
Deferred charges and other assets 73.0 80.7
$ 1,773.8 $ 1,723.6
See accompanying condensed notes to consolidated financial
statements.
PART 1.
Item 1.
CENTRAL TELEPHONE COMPANY
CONSOLIDATED BALANCE SHEETS (continued)
(In Millions)
June 30, December 31,
1994 1993
(Unaudited)
Liabilities and Stockholders' Equity
Current liabilities
Outstanding checks in excess of cash
balances $ 18.7 $ 17.5
Current maturities of long-term debt 22.1 22.7
Advances from affiliates 84.0 14.4
Accounts payable
Vendors and other 28.3 17.6
Interexchange carriers 32.5 32.2
Affiliated companies 14.2 32.2
Accrued merger, integration and
restructuring costs 7.4 24.3
Accrued interest 16.1 17.2
Advance billings 16.5 16.2
Accrued vacation pay 13.6 15.2
Accrued taxes 17.8 7.3
Other 29.4 35.4
Total current liabilities 300.6 252.2
Long-term debt 469.7 440.9
Deferred credits and other liabilities
Deferred income taxes and investment tax
credits 256.9 276.4
Postretirement benefits obligations 75.9 71.6
Regulatory liability 53.2 59.1
Other 29.6 15.2
415.6 422.3
Redeemable preferred stock 6.9 6.9
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
Non-redeemable preferred stock 2.0 2.0
Retained earnings 224.6 244.9
581.0 601.3
$ 1,773.8 $ 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 Six Months
Ended Ended
June 30, June 30,
1994 1993 1994 1993
Operating revenues
Local service $ 112.4 $ 103.9 $ 221.5 $ 203.4
Toll and access service 85.1 85.4 173.5 166.5
Other 26.4 26.1 51.5 50.4
223.9 215.4 446.5 420.3
Operating expenses
Plant operations 73.8 70.8 147.7 146.2
Depreciation and amortization 35.0 33.1 68.4 65.9
Other 70.5 63.5 136.9 129.7
Merger, integration and
restructuring costs -- -- -- 68.5
Total operating expenses 179.3 167.4 353.0 410.3
Operating income 44.6 48.0 93.5 10.0
Interest expense (9.8) (11.1) (18.5) (22.3)
Other income (expense), net 1.0 -- 1.3 (0.2)
Income (loss) before income
taxes and cumulative effect of
changes in accounting
principles 35.8 36.9 76.3 (12.5)
Income tax (provision) benefit (12.0) (11.9) (25.7) 8.6
Income (loss) before cumulative
effect of changes in
accounting principles 23.8 25.0 50.6 (3.9)
Cumulative effect of changes in
accounting principles, net -- -- (1.6) (21.6)
Net income (loss) 23.8 25.0 49.0 (25.5)
Preferred stock dividends (0.1) (0.1) (0.2) (0.3)
Earnings (loss) applicable to
common stock $ 23.7 $ 24.9 $ 48.8 $(25.8)
Pro forma amounts assuming the
change in accounting for
software costs was
retroactively applied
Net income (loss) $ -- $ 25.0 $ -- $ (3.9)
See accompanying condensed notes to consolidated financial
statements.
PART I.
Item 1.
CENTRAL TELEPHONE COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Millions)
(Unaudited)
Six Months Ended
June 30,
1994 1993
Operating activities
Net income (loss) $ 49.0 $ (25.5)
Adjustments to reconcile net income (loss)
to net cash provided by operating
activities
Depreciation and amortization 68.4 65.9
Cumulative effect of changes in accounting
principles 1.6 21.6
Deferred income taxes and investment tax
credits (11.0) (21.0)
Changes in operating assets and liabilities
Receivables, net (21.3) 1.8
Other current assets 2.6 4.0
Accounts payable, accrued expenses and other
current liabilities (20.6) 44.1
Noncurrent assets and liabilities, net 22.6 23.0
Other, net (1.5) 0.5
Net cash provided by operating activities 89.8 114.4
Investing activities
Capital expenditures (106.1) (83.0)
Increase in advances to affiliates (9.7) (23.5)
Other, net (1.3) 0.4
Net cash used by investing activities (117.1) (106.1)
Financing activities
Proceeds from long-term debt -- 11.9
Retirements of long-term debt (2.0) (26.7)
Increase in short-term borrowings 30.0 9.9
Increase in advances from affiliates 69.6 6.6
Dividends paid (69.3) (10.3)
Other, net 0.2 (0.1)
Net cash provided (used) by financing
activities 28.5 (8.7)
Increase (decrease) in cash 1.2 (0.4)
Cash at beginning of period 9.5 7.3
Cash at end of period $ 10.7 $ 6.9
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 six-
month interim periods ended June 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 balance sheets, 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 six months ended
June 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 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
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. The portion of such charge attributable to the Company
during 1993 was $77 million, of which $69 million was recorded
during the first half of 1993. This nonrecurring charge reduced
net income for the first half of 1993 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 six months ended June 30, 1994 and 1993,
respectively, are as follows (in millions):
Six Months Ended
June 30,
1994 1993
Income tax (provision) benefit at the
statutory rate $ (26.7) $ 4.3
Effect of:
Investment tax credits included in income 2.1 2.3
State income taxes, net of federal income
tax effect (2.3) 0.3
Reversal of rate differentials 1.9 1.9
Other, net (0.7) (0.2)
Income tax (provision) benefit, including
investment tax credits $ (25.7) $ 8.6
Effective income tax rate 34% 69%
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
Six Months Ended
June 30,
1994 1993
Cash paid for (in millions):
Interest $ 18.9 $ 19.1
Income taxes $ 24.1 $ 10.1
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 which had 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 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 first half of 1993. This
nonrecurring charge reduced net income for the first half of 1993
by $44 million.
Liquidity and Capital Resources
Cash flows from operating activities, which are the Company's
primary source of liquidity, were $90 million during the first half
of 1994 compared to $114 million during the first half of 1993.
The decrease in operating cash flows reflects increases in
affiliated accounts receivable and reduced affiliated accounts
payable. These decreases in cash flows were partially offset by
improved operating results.
The Company's investing activities used cash of $117 million and
$106 million during the first half 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 $190 million.
Financing activities provided cash of $29 million in the first half
of 1994 and used cash of $9 million in the comparable 1993 period.
Long-term debt retirements during the first half of 1993 included
the redemption of $25 million of debt prior to scheduled
maturities. Increased advances from affiliates in the first half
of 1994 were offset by an increase in dividends paid.
As of June 30, 1994, the Company's total capitalization aggregated
$1.16 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 49 percent of total capitalization as of June 30, 1994
compared to 44 percent at year-end 1993.
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 has
been appealed to the Illinois Appellate Court by petitioners
representing consumers.
In July 1994, the Illinois Commerce Commission granted MFS
Intelenet of 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. TC Systems -
Illinois, Inc. has also filed an application with the Illinois
Commerce Commission for 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 subsidiary; this application is pending.
Results of Operations
Net operating revenues increased 4 percent and 6 percent in the
second quarter and first half of 1994, respectively, over the
comparable 1993 periods. Local service revenues, derived from
providing local exchange telephone service, increased 8 percent and
9 percent in the second quarter and first half 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 5.8 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, were relatively flat for the second quarter of
1994 as compared to 1993. These revenues increased $7 million
during the first half of 1994 relative to the comparable 1993
period. 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 half
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 will result in decreased
access rates; however, the impact of such decreases are not
expected to be material.
Exclusive of the merger, integration and restructuring costs,
operating expenses increased $12 million and $11 million in the
second quarter and first half 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 $4 million in the second
quarter and first half 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 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 June
30, 1994.
Item 2. Changes in Securities
There were no reportable events during the quarter ended June
30, 1994.
Item 3. Defaults Upon Senior Securities
There were no reportable events during the quarter ended June
30, 1994.
Item 4. Submission of Matters to a Vote of Security Holders
There were no reportable events during the quarter ended June
30, 1994.
Item 5. Other Information
The Company's ratios of earnings to fixed charges were 4.06
and 3.77 for the three months ended and 4.39 and .53 for the
six months ended June 30, 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 first
quarter of 1993, the ratio of earnings to fixed charges would
have been 3.12 for the six months ended June 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.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the quarter ended
June 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: August 12, 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 Six Months
Ended Ended
June 30, June 30,
1994 1993 1994 1993
Income (loss) before
cumulative effect of changes
in accounting principles $ 23.8 $ 25.0 $ 50.6 $ (3.9)
Income tax provision
(benefit) 12.0 11.9 25.7 (8.6)
Subtotal 35.8 36.9 76.3 (12.5)
Fixed charges
Interest charges 9.8 11.1 18.5 22.3
Interest factor of operating
rents 1.8 1.9 3.7 3.7
Pre-tax cost of preferred
stock dividends of
subsidiaries 0.1 0.3 0.3 0.4
Total fixed charges 11.7 13.3 22.5 26.4
Earnings, as adjusted $ 47.5 $ 50.2 $ 98.8 $ 13.9
Ratio of earnings to fixed
charges 4.06 3.77 4.39 .53(1)
(1) Earnings as computed for the ratio of earnings to fixed
charges were inadequate to cover fixed charges for the six months
ended June 30, 1993. The amount of the coverage deficiency was
$12.5 million. Earnings as computed for the ratio of earnings to
fixed charges includes the nonrecurring merger, integration and
restructuring costs of $69 million recorded during the first
quarter of 1993. In the absence of the nonrecurring costs, the
ratio of earnings to fixed charges would have been 3.12 for the
six months ended June 30, 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 factor of operating rents and the pretax cost of
preferred stock dividends of subsidiaries.
