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, 1995
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 (I.R.S. Employer
incorporation 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, 1995 -- 2,250,000
CENTRAL TELEPHON COMPANY
FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 1995
INDEX
Part I - Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Cash Flows
Condensed Notes to Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Part II - Other Information
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of
Security Holders
Item 5. Other Information
Item 6. Reports on Form 8-K
Signatures
PART 1.
Item 1.
CENTRAL TELEPHONE COMPANY
CONSOLIDATED BALANCE SHEETS
(In Millions)
As of As of
June 30, December 31,
1995 1994
(Unaudited)
Assets
Current assets
Cash $ 20.3 $ 19.2
Receivables
Customers and other, net of allowance
for doubtful accounts of $1.4 million
($0.5 million in 1994) 111.0 95.4
Interexchange carriers 35.6 31.7
Affiliated companies 22.0 24.8
Advances to affiliates 95.0 38.2
Deferred income taxes 1.4 4.2
Prepaid expenses and other 21.4 15.8
Total current assets 306.7 229.3
Property, plant and equipment
Land and buildings 121.4 119.2
Telephone network equipment and
outside plant 2,362.5 2,282.9
Other 139.6 136.3
Construction in progress 47.5 29.6
2,671.0 2,568.0
Less accumulated depreciation (1,086.0) (1,026.6)
1,585.0 1,541.4
Deferred charges and other assets 54.1 64.1
$ 1,945.8 $ 1,834.8
See accompanying condensed Notes to Consolidated Financial Statements.
PART 1.
Item 1.
CENTRAL TELEPHONE COMPANY
CONSOLIDATED BALANCE SHEETS (continued)
(In Millions)
As of As of
June 30, December 31,
1995 1994
(Unaudited)
Liabilities and Stockholders' Equity
Current liabilities
Outstanding checks in excess of cash
balances $ 7.4 $ 3.1
Current maturities of long-term debt 4.2 4.3
Advances from affiliates 124.4 90.3
Accounts payable
Vendors and other 27.8 27.3
Interexchange carriers 50.4 35.7
Affiliated companies 47.2 37.1
Advance billings 17.1 17.2
Accrued taxes 15.8 22.3
Other 61.1 70.3
Total current liabilities 355.4 307.6
Long-term debt 545.7 510.2
Deferred credits and other liabilities
Deferred income taxes and investment tax
credits 249.1 259.6
Postretirement benefits obligations 72.5 64.8
Regulatory liabilities 49.8 52.1
Other 33.4 25.7
404.8 402.2
Redeemable preferred stock 5.4 6.7
Common stock and other stockholders'
equity
Common stock, no par value, authorized,
issued and outstanding - 2.3 million
shares 353.1 353.1
Non-redeemable preferred stock 2.0 2.0
Capital in excess of stated value 1.6 1.3
Retained earnings 277.8 251.7
634.5 608.1
$ 1,945.8 $ 1,834.8
See accompanying condensed Notes to Consolidated Financial Statements.
PART I.
Item 1.
CENTRAL TELEPHONE COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(In Millions)
Three Months Ended Six Months Ended
June 30, June 30,
1995 1994 1995 1994
Operating revenues
Local service $ 120.5 $ 112.4 $ 238.2 $ 221.5
Toll and access service 94.8 85.1 189.8 173.5
Other 31.9 26.4 61.7 51.5
Total operating revenues 247.2 223.9 489.7 446.5
Operating expenses
Plant operations 80.6 73.8 160.6 147.7
Depreciation and
amortization 37.6 35.0 74.6 68.4
Customer operations 38.4 35.3 76.5 68.8
Other operations 36.5 35.2 72.2 68.1
Total operating expenses 193.1 179.3 383.9 353.0
Operating income 54.1 44.6 105.8 93.5
Interest expense (12.9) (9.8) (24.1) (18.5)
Other income, net 2.1 1.0 2.8 1.3
Income before income
taxes and cumulative
effect of changes in
accounting principles 43.3 35.8 84.5 76.3
Income tax provision (15.2) (12.0) (29.6) (25.7)
Income before cumulative
effect of changes in
accounting principles 28.1 23.8 54.9 50.6
Cumulative effect of
changes in accounting
principles, net -- -- -- (1.6)
Net income 28.1 23.8 54.9 49.0
Preferred stock
dividends (0.1) (0.1) (0.2) (0.2)
Earnings applicable to
common stock $ 28.0 $ 23.7 $ 54.7 $ 48.8
See accompanying condensed Notes to Consolidated Financial Statements.
PART I.
Item 1.
CENTRAL TELEPHONE COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In Millions)
Six Months Ended
June 30,
1995 1994
Operating activities
Net income $ 54.9 $ 49.0
Adjustments to reconcile net income to net
cash provided by operating activities
Depreciation and amortization 74.6 68.4
Cumulative effect of changes in accounting
principles -- 1.6
Deferred income taxes and investment tax
credits (9.9) (11.0)
Changes in operating assets and liabilities
Receivables, net (16.2) (21.3)
Other current assets (5.6) 2.6
Accounts payable, accrued expenses and other
current liabilities 13.8 (20.6)
Noncurrent assets and liabilities, net 25.3 22.6
Other, net (0.9) (1.5)
Net cash provided by operating activities 136.0 89.8
Investing activities
Capital expenditures (117.2) (106.1)
Increase in advances to affiliates (56.8) (9.7)
Other, net (0.6) (1.3)
Net cash used by investing activities (174.6) (117.1)
Financing activities
Retirements of long-term debt (1.1) (2.0)
Increase in notes payable 36.5 30.0
Increase in advances from affiliates 34.1 69.6
Dividends paid (28.8) (69.3)
Other, net (1.0) 0.2
Net cash provided by financing activities 39.7 28.5
Increase in cash 1.1 1.2
Cash at beginning of period 19.2 9.5
Cash at end of period $ 20.3 $ 10.7
Supplemental cash flows information
Cash paid for interest $ 20.2 $ 18.9
Cash paid for income taxes $ 43.5 $ 24.1
See accompanying condensed Notes to Consolidated Financial Statements.
PART I.
Item 1.
CENTRAL TELEPHONE COMPANY
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
June 30, 1995 and 1994
The information contained in this Form 10-Q for the three and six-
month interim periods ended June 30, 1995 and 1994 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 accruals, 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 have been condensed or
omitted. The results of operations for the six months ended June
30, 1995 are not necessarily indicative of the operating results
that may be expected for the year ended December 31, 1995.
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
Sprint Corporation (Sprint); accordingly, earnings per share
information has been omitted. The Company is in the business of
providing communications services, principally local, network
access and toll services in portions of Florida, Illinois, Nevada,
North Carolina and Virginia.
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.
Accounting Change
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 being 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 income as a
cumulative effect of change in accounting principle. Adoption of
SFAS No. 112 had no significant impact on operating expenses in
1994.
Reclassifications
Certain amounts in the accompanying consolidated financial
statements for 1994 have been reclassified to conform to the
presentation of amounts in the 1995 consolidated financial
statements. These reclassifications had no effect on the results
of operations.
2. 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
six months ended June 30, 1995 and 1994, respectively, are as
follows (in millions):
Six Months Ended
June 30,
1995 1994
Income tax provision at the statutory rate $ 29.6 $ 26.7
Effect of:
Investment tax credits included in income (1.8) (2.1)
State income taxes, net of federal income
tax effect 3.0 2.3
Reversal of rate differentials (1.5) (1.9)
Other, net 0.3 0.7
Income tax provision $ 29.6 $ 25.7
Effective income tax rate 35.0% 33.7%
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 $136 million during the first six
months of 1995 compared to $90 million during the first six months
of 1994. The increase in operating cash flows reflects reduced
working capital requirements.
The Company's investing activities used cash of $175 million and
$117 million during the first six months of 1995 and 1994,
respectively. The increase in cash used for investing activities
was due to increases in advances to affiliates and increased
capital expenditures. Capital expenditures, which represent the
Company's most significant investing activity, were $117 million
and $106 million during the first six months of 1995 and 1994,
respectively. Capital expenditures were made to accommodate access
line growth and to expand the capabilities for providing enhanced
telecommunications services.
Financing activities provided cash of $40 million and $29 million
in the first six months of 1995 and 1994, respectively. The change
in cash flows from financing activities is largely due to a
reduction in dividends paid.
As of June 30, 1995, the Company's total capitalization aggregated
$1.31 billion, consisting of long-term debt (including current
maturities), advances from affiliates, redeemable preferred stock,
and common stock and other stockholders' equity. Long-term debt
(including current maturities and advances from affiliates)
comprised 51.3 percent of total capitalization as of June 30, 1995
compared to 49.6 percent at year-end 1994.
During 1995, the Company anticipates funding estimated capital
expenditures of $215 million with cash flows from operating
activities. The Company continues to expect its external cash
requirements for 1995 to be approximately $40 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.
Results of Operations
Net operating revenues increased 10.4 percent and 9.7 percent in
the second quarter and first half of 1995, respectively, over the
comparable 1994 periods. Local service revenues, derived from
providing local exchange telephone service, increased 7.2 percent
and 7.5 percent in the second quarter and first half of 1995,
respectively, over the comparable 1994 periods. This increase
reflects continued growth in the number of access lines served, add-
on services such as custom calling features, and increased Centrex
revenues. The number of access lines served grew 5.4 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 $10 million and $16 million during
the second quarter and first half of 1995, respectively, relative
to the comparable 1994 periods as a result of increased traffic
volumes. During the first quarter of 1995, the Federal
Communications Commission announced a new interim interstate price
caps plan which became effective August 1, 1995. Under the new
plan, the Company has adopted a rate formula based on the maximum
productivity factors that will effectively remove the earnings cap
on the Company's interstate access revenues. Interstate access
revenues currently comprise approximately 55 percent of the
Company's toll and access service revenues.
Operating expenses increased $14 million and $31 million in the
second quarter and first half of 1995, respectively, from the
comparable 1994 periods. The increases are primarily due to
increases in plant operations expense related to the costs of
providing services resulting from access line growth. Customer
operations expense increased due to expanded customer services.
Interest expense increased $3 million and $6 million in the second
quarter and first half of 1995, respectively, over the comparable
1994 periods. The increases were generally due to increases in
average levels of debt outstanding.
The Company's income tax provisions for the first six months of
1995 and 1994 resulted in effective tax rates of 35.0 percent and
33.7 percent, respectively. See Note 2 of condensed 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.
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. The Company would be required to
discontinue accounting under SFAS No. 71 if the existing and
anticipated levels of competition no longer allow for service and
product pricing that provides for the recovery of costs. SFAS No.
71 would also be required to be discontinued if the existing
regulatory framework continues to evolve from rate-base regulation
to price regulation as the latter does not provide for the recovery
of specific costs.
Management currently believes the Company's operations meet the
criteria for the continued application of SFAS No. 71. However,
the Company operates in an evolving environment in which the
regulatory framework is transitioning to price regulation in
certain states in which the company operates and the level and
types of competition are increasing. Accordingly, the Company
constantly monitors and evaluates the on-going 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. If the current regulatory and competitive trends
continue, it is increasingly likely that the Company will
discontinue accounting under SFAS No. 71 due to the effect of one
or both of these conditions. In the event the Company determines
that its rate-regulated 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.
The resulting material noncash charge would be recorded as an
extraordinary item.
PART II.
Other Information
Item 1. Legal Proceedings
There were no reportable events during the quarter ended June
30, 1995.
Item 2. Changes in Securities
There were no reportable events during the quarter ended June
30, 1995.
Item 3. Defaults Upon Senior Securities
There were no reportable events during the quarter ended June
30, 1995.
Item 4. Submission of Matters to a Vote of Security Holders
There were no reportable events during the quarter ended June
30, 1995.
Item 5. Other Information
None.
Item 6. Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended
June 30, 1995.
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: August 10, 1995
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