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, 1996
----------------------------------
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)
- --------------------------------------------------------------------------------
(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, 1996 -- 2,250,000
<PAGE>
CENTRAL TELEPHONE COMPANY
FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 1996
INDEX
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Page
Number
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Part I - Financial Information
<S> <C>
Item 1. Financial Statements 1 - 6
Consolidated Balance Sheets 1 - 2
Consolidated Statements of Operations 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. Exhibit and Reports on Form 8-K 9
Signature 10
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<TABLE>
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PART I.
Item 1.
CENTRAL TELEPHONE COMPANY
CONSOLIDATED BALANCE SHEETS
(In Millions)
As of As of
March 31, December 31,
1996 1995
- ---------------------------------------------------------------------- --- ------------------ --- ------------------
(Unaudited)
Assets
Current assets
<S> <C> <C>
Cash $ 5.8 $ 8.3
Receivables
Customers and other, net of allowance for doubtful accounts of
$1.9 million ($2.3 million in 1995) 112.4 109.2
Interexchange carriers 31.4 33.8
Affiliated companies 12.1 11.6
Advances to affiliates 33.2 67.7
Prepaid expenses and other 28.8 31.9
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Total current assets 223.7 262.5
Property, plant and equipment
Land and buildings 124.6 124.1
Telephone network equipment and outside plant 2,522.7 2,468.8
Other 147.1 145.4
Construction in progress 86.9 46.7
- ---------------------------------------------------------------------- --- ------------------ --- ------------------
2,881.3 2,785.0
Less accumulated depreciation (1,534.9) (1,494.8)
- ---------------------------------------------------------------------- --- ------------------ --- ------------------
1,346.4 1,290.2
Deferred charges and other assets 29.3 30.8
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$ 1,599.4 $ 1,583.5
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See accompanying condensed Notes to Consolidated Financial Statements.
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1
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<CAPTION>
PART I.
Item 1.
CENTRAL TELEPHONE COMPANY
CONSOLIDATED BALANCE SHEETS (continued)
(In Millions)
As of As of
March 31, December 31,
1996 1995
- ---------------------------------------------------------------------------------------------------------------------
(Unaudited)
Liabilities and Stockholders' Equity
Current liabilities
<S> <C> <C>
Outstanding checks in excess of cash balances $ 8.6 $ 4.3
Current maturities of long-term debt 22.5 34.3
Short-term borrowings -- 58.1
Advances from affiliates 166.4 149.4
Accounts payable
Vendors and other 46.9 34.2
Interexchange carriers 38.4 36.9
Affiliated companies 52.9 35.7
Accrued taxes 30.4 14.1
Other 76.9 86.0
- ---------------------------------------------------------------------------------------------------------------------
Total current liabilities 443.0 453.0
Long-term debt 399.0 399.2
Deferred credits and other liabilities
Deferred income taxes and investment tax credits 138.0 140.7
Postretirement and other benefit obligations 84.2 79.3
Other 33.5 37.6
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255.7 257.6
Redeemable preferred stock 4.6 5.1
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 1.6
Retained earnings 140.4 111.9
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497.1 468.6
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$ 1,599.4 $ 1,583.5
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See accompanying condensed Notes to Consolidated Financial Statements.
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2
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<CAPTION>
PART I.
Item 1.
CENTRAL TELEPHONE COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(In Millions)
Three Months Ended
March 31,
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1996 1995
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Operating revenues
<S> <C> <C>
Local service $ 128.5 $ 117.7
Toll and access service 98.2 95.0
Other 34.9 29.8
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Total operating revenues 261.6 242.5
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Operating expenses
Plant operations 80.5 80.0
Depreciation and amortization 49.6 37.0
Customer operations 37.9 38.1
Other operations 38.2 35.7
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Total operating expenses 206.2 190.8
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Operating income 55.4 51.7
Interest expense (10.6) (11.2)
Other income, net 0.2 0.7
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Income before income taxes 45.0 41.2
Income tax provision (16.4) (14.4)
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Net income 28.6 26.8
Preferred stock dividends (0.1) (0.1)
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Earnings applicable to common stock $ 28.5 $ 26.7
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See accompanying condensed Notes to Consolidated Financial Statements.
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3
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<TABLE>
<CAPTION>
PART I.
Item 1.
CENTRAL TELEPHONE COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In Millions)
Three Months Ended
March 31,
----------------------------------
1996 1995
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Operating activities
<S> <C> <C>
Net income $ 28.6 $ 26.8
Adjustments to reconcile net income to net cash provided by operating
activities
Depreciation and amortization 49.6 37.0
Deferred income taxes and investment tax credits (3.0) (9.1)
Changes in operating assets and liabilities
Receivables, net (1.2) (10.8)
Other current assets 3.4 (2.9)
Accounts payable, accrued expenses and other current liabilities 42.9 24.6
Noncurrent assets and liabilities, net 1.6 12.3
Other, net 1.1 (0.5)
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Net cash provided by operating activities 123.0 77.4
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Investing activities
Capital expenditures (105.5) (62.0)
(Increase) decrease in advances to affiliates 34.5 (31.4)
Other, net (0.7) (0.4)
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Net cash used by investing activities (71.7) (93.8)
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Financing activities
Retirements of long-term debt (12.0) (0.6)
Increase (decrease) in notes payable (58.1) 15.0
Increase in advances from affiliates 17.0 19.5
Dividends paid (0.1) (16.6)
Other, net (0.6) (0.9)
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Net cash provided (used) by financing activities (53.8) 16.4
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Decrease in cash (2.5) --
Cash at beginning of period 8.3 19.2
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Cash at end of period $ 5.8 $ 19.2
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Supplemental cash flows information
Cash paid for interest $ 14.8 $ 15.1
Cash paid for income taxes $ 0.3 $ 7.9
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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)
March 31, 1996 and 1995
The information contained in this Form 10-Q for the three-month interim periods
ended March 31, 1996 and 1995 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
three months ended March 31, 1996 are not necessarily indicative of the
operating results that may be expected for the year ended December 31, 1996.
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 preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
During 1995, the Company determined that it no longer met 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." Accordingly, effective December 31, 1995, the
Company adopted accounting principles for a competitive marketplace.
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 three months ended March
31, 1996 and 1995, respectively, are as follows (in millions):
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<CAPTION>
Three Months Ended
March 31,
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1996 1995
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<S> <C> <C>
Income tax provision at the statutory rate $ 15.8 $ 14.4
Effect of:
State income taxes, net of federal income tax effect 1.5 1.4
Investment tax credits included in income (0.5) (0.9)
Other, net (0.4) (0.5)
- ------------------------------------------------------------------------------- --- ------------- -- -------------
Income tax provision $ 16.4 $ 14.4
--- ------------- -- -------------
Effective income tax rate 36.4% 35.0%
--- ------------- -- -------------
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6
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PART I.
Item 2.
CENTRAL TELEPHONE COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
The Company adopted accounting principles for a competitive marketplace
effective December 31, 1995 and discontinued applying Statement of Financial
Accounting Standards (SFAS) No. 71, "Accounting for the Effects of Certain Types
of Regulation," to its operations. The primary effects of the Company's
discontinued application of SFAS No. 71 were that certain accumulated
depreciation balances were increased, plant asset lives were shortened from
regulator-prescribed lives to estimated economic lives, switch software costs
which had previously been expensed as incurred are now being capitalized and
amortized, and the effects of any actions of regulators that had been recognized
as assets and liabilities pursuant to SFAS No. 71 but which would not have been
recognized as such by enterprises in general were eliminated from the
consolidated balance sheet. The Company does not expect the discontinued
application of SFAS No. 71 to have a material impact on 1996 operating results;
however, depreciation expense is expected to increase due to shortened plant
asset lives.
Approximately 74 percent of the Company's access lines are subject to
alternative regulation. In 1995, the Company filed for a rate increase with the
Nevada Public Service Commission, which adopted a stipulation authorizing a rate
increase of approximately $4 million on an annual basis, effective January 1,
1996, and authorizing the Company to operate under a 5-year plan of alternative
regulation. The plan provides for price regulation of the Company's Nevada
operations, which represent approximately 39 percent of its access lines, and
caps basic service rates for 5 years. Effective January 1, 1996, the Company's
operations in Florida, which represent approximately 21 percent of its access
lines, changed from rate of return regulation to price regulation. At the same
time, the Florida local markets were opened to competition. Effective in June
1996, North Carolina, which represents an additional 14 percent of the Company's
access lines, will also adopt alternative regulation. It is anticipated that
nearly 90 percent of the Company's access lines will be under some form of price
regulation by the end of 1996. The shift from rate of return regulation to
various forms of alternative regulation is resulting in the recognition of
seasonal trends in the Company's revenues.
Net operating revenues increased 8 percent in the first quarter of 1996 over the
comparable 1995 period. Local service revenues, derived from providing local
exchange telephone service, increased 9 percent in the first quarter of 1996
over the comparable 1995 period. This increase reflects continued increases in
the number of access lines served and growth in higher-margin advanced network
services. The number of access lines served grew 6.5 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 $3 million
during the first quarter of 1996 relative to the comparable 1995 period. The
increase was a result of increased traffic volumes reflecting strong economic
conditions in the Company's operating territories, particularly Nevada and
Florida. This increase was partially offset by a decrease in intralata long
distance revenues due to expanded local area calling regions. The increased
revenues also reflect the impact of the Federal Communications Commission's 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 60 percent of the Company's toll and access service revenues.
7
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Operating expenses increased $15 million in the first quarter of 1996 from the
comparable 1995 period. The increase was primarily due to an increase in
depreciation and amortization expense related to increased capital expenditures,
shortened plant asset lives and the amortization of switch software costs which
are now being capitalized in conjunction with the adoption of accounting
principles for a competitive marketplace. The capitalization of switch software
costs also caused a decrease in plant operations expense which was substantially
offset by an increase in the costs of providing services resulting from access
line growth.
The Company's income tax provisions for the first quarter of 1996 and 1995
resulted in effective tax rates of 36.4 percent and 35.0 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.
Liquidity and Capital Resources
Cash flows from operating activities, which are the Company's primary source of
liquidity, were $123 million during the first three months of 1996 compared to
$77 million during the first three months of 1995. The increase in operating
cash flows reflects reduced working capital requirements and improved operating
results.
The Company's investing activities used cash of $72 million and $94 million
during the first three months of 1996 and 1995, respectively. The decrease in
cash used for investing activities was due to decreases in advances to
affiliates, partially offset by increased capital expenditures. Capital
expenditures, which represent the Company's most significant investing activity,
were $106 million and $62 million during the first three months of 1996 and
1995, respectively. The increase in capital expenditures reflects the
capitalization of switch software costs which had previously been expensed, as
well as increased access line growth and expansion of the capabilities for
providing enhanced telecommunications services.
Financing activities used cash of $54 million in the first three months of 1996
and provided cash of $16 million in the comparable 1995 period. The change in
cash flows from financing activities was largely due to a reduction of debt,
partially offset by the absence of common stock dividends in 1996. During 1996,
the Company called for redemption, prior to scheduled maturities, $12 million of
first mortgage bonds. The prepayment penalty incurred in connection with this
early extinguishment was insignificant.
As of March 31, 1996, the Company's total capitalization aggregated $1.09
billion, consisting of short-term borrowings, long-term debt (including current
maturities), advances from affiliates, redeemable preferred stock, and common
stock and other stockholders' equity. Short-term borrowings, long-term debt
(including current maturities) and advances from affiliates comprised 54 percent
of total capitalization as of March 31, 1996 compared to 58 percent at year-end
1995.
During 1996, the Company anticipates funding estimated capital expenditures of
$260 million with cash flows from operating activities. Scheduled maturities of
long-term debt will be funded with cash flows from operating activities,
advances from affiliates, or from external sources, depending on prevailing
market conditions during the year. Additionally, depending on prevailing market
conditions, the Company may redeem certain long-term debt prior to scheduled
maturities.
8
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PART II.
Other Information
Item 1. Legal Proceedings
There were no reportable events during the quarter ended March 31,
1996.
Item 2. Changes in Securities
There were no reportable events during the quarter ended March 31,
1996.
Item 3. Defaults Upon Senior Securities
There were no reportable events during the quarter ended March 31,
1996.
Item 4. Submission of Matters to a Vote of Security Holders
There were no reportable events during the quarter ended March 31,
1996.
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
March 31, 1996.
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: May 15, 1996
10
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EXHIBIT INDEX
EXHIBIT
NUMBER
27 Financial Data Schedule.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> Dec-31-1996
<PERIOD-END> Mar-31-1996
<CASH> 5,800
<SECURITIES> 0
<RECEIVABLES> 157,800
<ALLOWANCES> 1,900
<INVENTORY> 0
<CURRENT-ASSETS> 223,700
<PP&E> 2,881,300
<DEPRECIATION> 1,534,900
<TOTAL-ASSETS> 1,599,400
<CURRENT-LIABILITIES> 443,000
<BONDS> 399,000
4,600
2,000
<COMMON> 353,100
<OTHER-SE> 142,000
<TOTAL-LIABILITY-AND-EQUITY> 1,599,400
<SALES> 0
<TOTAL-REVENUES> 261,600
<CGS> 0
<TOTAL-COSTS> 168,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 10,600
<INCOME-PRETAX> 45,000
<INCOME-TAX> 16,400
<INCOME-CONTINUING> 28,600
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 28,600
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
