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, 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 incorporation (I.R.S. Employer
or organization) Identification No.)
P.O. Box 11315, Kansas City, Missouri 64112
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(Address of principal executive offices)
(913) 624-3000
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(Registrant's telephone number, including area code)
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(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, 1995 -- 2,250,000
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CENTRAL TELEPHONE COMPANY
FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 1995
INDEX
Page
Number
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Part I - Financial Information
Item 1. Financial Statements 1 - 6
Consolidated Balance Sheets 1 - 2
Consolidated Statements of Income 3
Consolidated Statements of Cash Flows 4
Condensed Notes to Consolidated Financial Statements 5 - 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 7 - 8
Part II - Other Information
Item 1. Legal Proceedings 9
Item 2. Changes in Securities 9
Item 3. Defaults Upon Senior Securities 9
Item 4. Submission of Matters to a Vote of Security Holders 9
Item 5. Other Information 9
Item 6. Reports on Form 8-K 9
Signature 10
Exhibit
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PART 1.
Item 1.
CENTRAL TELEPHONE COMPANY
CONSOLIDATED BALANCE SHEETS
(In Millions)
As of As of
September 30, December 31,
1995 1994
- ---------------------------------------------------------------------- --- ------------------ --- ------------------
(Unaudited)
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Assets
Current assets
Cash $ 9.7 $ 19.2
Receivables
Customers and other, net of allowance for doubtful accounts of
$1.5 million ($0.5 million in 1994) 122.3 95.4
Interexchange carriers 35.7 31.7
Affiliated companies 23.1 24.8
Advances to affiliates 105.3 38.2
Deferred income taxes 1.0 4.2
Prepaid expenses and other 22.6 15.8
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Total current assets 319.7 229.3
Property, plant and equipment
Land and buildings 122.7 119.2
Telephone network equipment and outside plant 2,404.7 2,282.9
Other 142.8 136.3
Construction in progress 41.3 29.6
- ---------------------------------------------------------------------- --- ------------------ --- ------------------
2,711.5 2,568.0
Less accumulated depreciation (1,112.1) (1,026.6)
- ---------------------------------------------------------------------- --- ------------------ --- ------------------
1,599.4 1,541.4
Deferred charges and other assets 51.0 64.1
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$ 1,970.1 $ 1,834.8
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See accompanying condensed Notes to Consolidated Financial Statements.
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1
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PART 1.
Item 1.
CENTRAL TELEPHONE COMPANY
CONSOLIDATED BALANCE SHEETS (continued)
(In Millions)
As of As of
September 30, December 31,
1995 1994
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(Unaudited)
<S> <C> <C>
Liabilities and Stockholders' Equity
Current liabilities
Outstanding checks in excess of cash balances $ 9.9 $ 3.1
Current maturities of long-term debt 4.2 4.3
Advances from affiliates 141.3 90.3
Accounts payable
Vendors and other 28.9 27.3
Interexchange carriers 52.8 35.7
Affiliated companies 35.5 37.1
Advance billings 17.6 17.2
Accrued taxes 19.7 22.3
Other 54.1 70.3
- ---------------------------------------------------------------------------------------------------------------------
Total current liabilities 364.0 307.6
Long-term debt 553.8 510.2
Deferred credits and other liabilities
Deferred income taxes and investment tax credits 247.0 259.6
Postretirement benefits obligations 76.3 64.8
Regulatory liabilities 48.1 52.1
Other 33.3 25.7
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404.7 402.2
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 285.5 251.7
- ---------------------------------------------------------------------------------------------------------------------
642.2 608.1
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$ 1,970.1 $ 1,834.8
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See accompanying condensed Notes to Consolidated Financial Statements.
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2
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PART I.
Item 1.
CENTRAL TELEPHONE COMPANY
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(In Millions)
Three Months Ended Nine Months Ended
September 30, September 30,
--- ------------------------------ --- ------------------------------
1995 1994 1995 1994
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Operating revenues
Local service $ 122.1 $ 115.3 $ 360.3 $ 336.8
Toll and access service 100.3 93.7 290.1 267.2
Other 31.6 28.6 93.3 80.1
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Total operating revenues 254.0 237.6 743.7 684.1
- -------------------------------------------- --- ------------- -- ------------- --- ------------- -- -------------
Operating expenses
Plant operations 83.6 77.6 244.2 225.3
Depreciation and amortization 39.4 34.5 114.0 102.9
Customer operations 38.3 38.3 114.8 107.0
Other operations 35.8 36.8 108.0 105.0
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Total operating expenses 197.1 187.2 581.0 540.2
- -------------------------------------------- --- ------------- -- ------------- --- ------------- -- -------------
Operating income 56.9 50.4 162.7 143.9
Interest expense (11.6) (10.0) (35.7) (28.5)
Other income, net 0.3 1.1 3.1 2.4
- -------------------------------------------- --- ------------- -- ------------- --- ------------- -- -------------
Income before income taxes and cumulative
effect of changes in accounting
principles 45.6 41.5 130.1 117.8
Income tax provision (16.1) (14.2) (45.7) (39.9)
- -------------------------------------------- --- ------------- -- ------------- --- ------------- -- -------------
Income before cumulative effect of changes
in accounting principles
29.5 27.3 84.4 77.9
Cumulative effect of changes in accounting
principles, net -- -- -- (1.6)
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Net income 29.5 27.3 84.4 76.3
Preferred stock dividends (0.1) (0.2) (0.3) (0.4)
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Earnings applicable to common stock $ 29.4 $ 27.1 $ 84.1 $ 75.9
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See accompanying condensed Notes to Consolidated Financial Statements.
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3
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PART I.
Item 1.
CENTRAL TELEPHONE COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In Millions)
Nine Months Ended
September 30,
------------------------------
1995 1994
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Operating activities
Net income $ 84.4 $ 76.3
Adjustments to reconcile net income to net cash provided by operating
activities
Depreciation and amortization 114.0 102.9
Cumulative effect of changes in accounting principles -- 1.6
Deferred income taxes and investment tax credits (13.0) (8.2)
Changes in operating assets and liabilities
Receivables, net (28.1) (7.1)
Other current assets (6.8) (1.3)
Accounts payable, accrued expenses and other current liabilities 5.5 (23.6)
Noncurrent assets and liabilities, net 31.7 31.9
Other, net (1.5) (3.2)
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Net cash provided by operating activities 186.2 169.3
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Investing activities
Capital expenditures (171.0) (154.3)
Increase in advances to affiliates (67.1) (33.1)
Other, net (0.5) (1.5)
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Net cash used by investing activities (238.6) (188.9)
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Financing activities
Retirements of long-term debt (3.9) (21.9)
Increase in notes payable 47.4 67.0
Increase in advances from affiliates 51.0 57.5
Dividends paid (50.6) (79.0)
Other, net (1.0) --
- ------------------------------------------------------------------------------- --- ------------- -- -------------
Net cash provided by financing activities 42.9 23.6
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Increase (decrease) in cash (9.5) 4.0
Cash at beginning of period 19.2 9.5
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Cash at end of period $ 9.7 $ 13.5
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Supplemental cash flows information
Cash paid for interest $ 34.8 $ 33.7
Cash paid for income taxes $ 60.5 $ 36.5
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See accompanying condensed Notes to Consolidated Financial Statements.
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4
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PART I.
Item 1.
CENTRAL TELEPHONE COMPANY
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
September 30, 1995 and 1994
The information contained in this Form 10-Q for the three and nine-month interim
periods ended September 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
nine months ended September 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.
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.
5
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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 nine months ended
September 30, 1995 and 1994, respectively, are as follows (in millions):
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Nine Months Ended
September 30,
------------------------------
1995 1994
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Income tax provision at the statutory rate
$ 45.5 $ 41.2
Effect of:
Investment tax credits included in income (2.7) (3.2)
State income taxes, net of federal income tax effect 4.6 3.6
Reversal of rate differentials (2.3) (2.7)
Other, net 0.6 1.0
- ------------------------------------------------------------------------------- --- ------------- -- -------------
Income tax provision $ 45.7 $ 39.9
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Effective income tax rate 35.1% 33.9%
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3. Subsequent Event
The Company has determined that it no longer meets the criteria necessary for
the continued application of the accounting prescribed by Statement of Financial
Accounting Standards (SFAS) No. 71, "Accounting for the Effects of Certain Types
of Regulation." As a result of the discontinued application of SFAS No. 71, the
Company will recognize a noncash, after-tax extraordinary charge of between $180
million and $220 million in the fourth quarter of 1995 to adjust the net
carrying amount of telephone plant in-service and to eliminate regulatory assets
and liabilities.
6
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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 $186 million during the first nine months of 1995 compared to
$169 million during the first nine months of 1994. The increase in operating
cash flows reflects increased earnings and non-cash expenses.
The Company's investing activities used cash of $239 million and $189 million
during the first nine 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 $171 million
and $154 million during the first nine 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 $43 million and $24 million in the first
nine 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 September 30, 1995, the Company's total capitalization aggregated $1.35
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 51.9 percent of total capitalization as of September
30, 1995 compared to 49.6 percent at year-end 1994.
The Company anticipates funding capital expenditures for the remainder of 1995
of approximately $55 million with cash flows from operating activities.
In October 1995, the Company, Sprint and Sprint Capital Corporation (a
wholly-owned subsidiary of Sprint) renewed their revolving credit agreement with
a syndicate of domestic and international banks for five years. Under the
agreement, the Company can borrow up to an aggregate of $200 million.
Results of Operations
Net operating revenues increased 6.9 percent and 8.7 percent in the third
quarter and first nine months of 1995, respectively, over the comparable 1994
periods. Local service revenues, derived from providing local exchange telephone
service, increased 5.9 percent and 7.0 percent in the third quarter and first
nine months 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 5.6 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 $7 million and
$23 million during the third quarter and first nine months 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 adopted a rate formula
based on the maximum productivity factors that effectively removed 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.
7
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Operating expenses increased $10 million and $41 million in the third quarter
and first nine months 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.
Depreciation and amortization expense increased due to an increase in the asset
base and the implementation of depreciation rate changes in Florida. Customer
operations expense increased for the first nine months of 1995 due to expanded
customer services and increased marketing.
Interest expense increased $2 million and $7 million in the third quarter and
first nine months 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 nine months of 1995 and 1994
resulted in effective tax rates of 35.1 percent and 33.9 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 has historically accounted 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 has determined that it no longer meets the criteria necessary for
the continued application of the accounting prescribed by SFAS No. 71. The
Company's determination was based on changes in the regulatory framework, which
continues to evolve from rate-base regulation to price regulation as the latter
does not provide for the recovery of specific costs. In addition, with
technological changes and the convergence of competition in the
telecommunications industry, the levels and types of competition are increasing
such that service and product pricing may no longer provide for the recovery of
specific costs.
As a result of the discontinued application of SFAS No. 71, the Company, for
financial reporting purposes, is required to eliminate its regulatory assets and
liabilities and adjust the carrying amounts of its telephone plant in-service to
the extent that it determines that such amounts are either overstated as a
result of the regulatory process, or are not recoverable. Accordingly, the
Company will recognize a non-cash, after-tax extraordinary charge of between
$180 million and $220 million in the fourth quarter of 1995 to adjust the net
carrying amounts of telephone plant in-service and to eliminate regulatory
assets and liabilities.
8
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PART II.
Other Information
Item 1. Legal Proceedings
There were no reportable events during the quarter ended September 30,
1995.
Item 2. Changes in Securities
There were no reportable events during the quarter ended September 30,
1995.
Item 3. Defaults Upon Senior Securities
There were no reportable events during the quarter ended September 30,
1995.
Item 4. Submission of Matters to a Vote of Security Holders
There were no reportable events during the quarter ended September 30,
1995.
Item 5. Other Information
None.
Item 6. Exhibit and Reports on Form 8-K
(a) The following exhibit is filed as part of this report:
(27) Financial Data Schedule.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the quarter ended
September 30, 1995.
9
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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: November 14, 1995
10
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EXHIBIT INDEX
EXHIBIT
NUMBER
(27) Financial Data Schedule.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-Mos
<FISCAL-YEAR-END> Dec-31-1995
<PERIOD-END> Sep-30-1995
<CASH> 9,700
<SECURITIES> 0
<RECEIVABLES> 182,600
<ALLOWANCES> 1,500
<INVENTORY> 0
<CURRENT-ASSETS> 319,700
<PP&E> 2,711,500
<DEPRECIATION> 1,112,100
<TOTAL-ASSETS> 1,970,100
<CURRENT-LIABILITIES> 364,000
<BONDS> 553,800
<COMMON> 353,100
5,400
2,000
<OTHER-SE> 287,100
<TOTAL-LIABILITY-AND-EQUITY> 1,970,100
<SALES> 0
<TOTAL-REVENUES> 743,700
<CGS> 0
<TOTAL-COSTS> 473,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 35,700
<INCOME-PRETAX> 130,100
<INCOME-TAX> 45,700
<INCOME-CONTINUING> 84,400
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 84,400
<EPS-PRIMARY> 0.00
<EPS-DILUTED> 0.00
</TABLE>
