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, 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 June 30, 1996 -- 2,250,000
<PAGE>
CENTRAL TELEPHONE COMPANY
FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 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
June 30, December 31,
1996 1995
- ---------------------------------------------------------------------- --- ------------------ --- ------------------
(Unaudited)
Assets
Current assets
<S> <C> <C>
Cash $ 4.7 $ 8.3
Receivables
Customers and other, net of allowance for doubtful accounts of
$1.6 million ($2.3 million in 1995) 126.8 109.2
Interexchange carriers 33.9 33.8
Affiliated companies 9.8 11.6
Advances to affiliates -- 67.7
Prepaid expenses and other 26.7 31.9
- ---------------------------------------------------------------------- --- ------------------ --- ------------------
Total current assets 201.9 262.5
Property, plant and equipment
Land and buildings 125.4 124.1
Telephone network equipment and outside plant 2,568.1 2,468.8
Other 147.0 145.4
Construction in progress 90.7 46.7
- ---------------------------------------------------------------------- --- ------------------ --- ------------------
2,931.2 2,785.0
Less accumulated depreciation 1,553.9 1,494.8
- ---------------------------------------------------------------------- --- ------------------ --- ------------------
1,377.3 1,290.2
Deferred charges and other assets 25.6 30.8
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$ 1,604.8 $ 1,583.5
--- ------------------ --- ------------------
See accompanying condensed Notes to Consolidated Financial Statements.
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1
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PART I.
Item 1.
CENTRAL TELEPHONE COMPANY
CONSOLIDATED BALANCE SHEETS (continued)
(In Millions)
As of As of
June 30, December 31,
1996 1995
- ---------------------------------------------------------------------------------------------------------------------
(Unaudited)
Liabilities and Stockholders' Equity
Current liabilities
<S> <C> <C>
Outstanding checks in excess of cash balances $ 7.1 $ 4.3
Current maturities of long-term debt 22.5 34.3
Short-term borrowings -- 58.1
Advances from affiliates 200.6 149.4
Accounts payable
Vendors and other 27.0 34.2
Interexchange carriers 37.3 36.9
Affiliated companies 49.0 35.7
Accrued taxes 8.7 14.1
Other 85.8 86.0
- ---------------------------------------------------------------------------------------------------------------------
Total current liabilities 438.0 453.0
Long-term debt 380.7 399.2
Deferred credits and other liabilities
Deferred income taxes and investment tax credits 137.8 140.7
Postretirement and other benefits obligations 88.6 79.3
Other 29.3 37.6
- ---------------------------------------------------------------------------------------------------------------------
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 169.1 111.9
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525.8 468.6
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$ 1,604.8 $ 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 Six Months Ended
June 30, June 30,
--- ------------------------------ --- ------------------------------
1996 1995 1996 1995
- -------------------------------------------- --- ------------- -- ------------- --- ------------- -- -------------
Operating revenues
<S> <C> <C> <C> <C>
Local service $ 134.4 $ 120.5 $ 262.9 $ 238.2
Toll and access service 101.8 94.8 200.0 189.8
Other 36.6 31.9 71.5 61.7
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Total operating revenues 272.8 247.2 534.4 489.7
- -------------------------------------------- --- ------------- -- ------------- --- ------------- -- -------------
Operating expenses
Plant operations 84.2 80.6 164.7 160.6
Depreciation and amortization 51.3 37.6 100.9 74.6
Customer operations 39.2 38.4 77.1 76.5
Other operations 42.2 36.5 80.4 72.2
- -------------------------------------------- --- ------------- -- ------------- --- ------------- -- -------------
Total operating expenses 216.9 193.1 423.1 383.9
- -------------------------------------------- --- ------------- -- ------------- --- ------------- -- -------------
Operating income 55.9 54.1 111.3 105.8
Interest expense (10.0) (12.9) (20.6) (24.1)
Other income (expense), net (0.2) 2.1 -- 2.8
- -------------------------------------------- --- ------------- -- ------------- --- ------------- -- -------------
Income before income taxes 45.7 43.3 90.7 84.5
Income tax provision (16.9) (15.2) (33.3) (29.6)
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Net income 28.8 28.1 57.4 54.9
Preferred stock dividends (0.1) (0.1) (0.2) (0.2)
- -------------------------------------------- --- ------------- -- ------------- --- ------------- -- -------------
Earnings applicable to common stock $ 28.7 $ 28.0 $ 57.2 $ 54.7
--- ------------- -- ------------- --- ------------- -- -------------
See accompanying condensed Notes to Consolidated Financial Statements.
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3
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<CAPTION>
PART I.
Item 1.
CENTRAL TELEPHONE COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In Millions)
Six Months Ended
June 30,
------------------------------
1996 1995
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Operating activities
<S> <C> <C>
Net income $ 57.4 $ 54.9
Adjustments to reconcile net income to net cash provided by operating
activities
Depreciation and amortization 100.9 74.6
Deferred income taxes and investment tax credits (3.6) (9.9)
Changes in operating assets and liabilities
Receivables, net (15.6) (16.2)
Other current assets 5.9 (5.6)
Accounts payable, accrued expenses and other current liabilities 3.7 13.8
Noncurrent assets and liabilities, net 4.6 25.3
Other, net 0.9 (0.9)
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Net cash provided by operating activities 154.2 136.0
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Investing activities
Capital expenditures (186.4) (117.2)
(Increase) decrease in advances to affiliates 67.7 (56.8)
Other, net (1.1) (0.6)
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Net cash used by investing activities (119.8) (174.6)
- ------------------------------------------------------------------------------- --- ------------- -- -------------
Financing activities
Retirements of long-term debt (30.3) (1.1)
Increase (decrease) in notes payable (58.1) 36.5
Increase in advances from affiliates 51.2 34.1
Dividends paid (0.2) (28.8)
Other, net (0.6) (1.0)
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Net cash provided (used) by financing activities (38.0) 39.7
- ------------------------------------------------------------------------------- --- ------------- -- -------------
Increase (decrease) in cash (3.6) 1.1
Cash at beginning of period 8.3 19.2
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Cash at end of period $ 4.7 $ 20.3
--- ------------- -- -------------
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Supplemental cash flows information
Cash paid for interest $ 18.6 $ 19.6
Cash paid for income taxes $ 44.3 $ 43.5
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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)
June 30, 1996 and 1995
The information contained in this Form 10-Q for the three and six-month interim
periods ended June 30, 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 six
months ended June 30, 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.
Reclassifications
Certain amounts in the accompanying consolidated financial statements for the
prior periods have been reclassified to conform to the current period's
presentation in the accompanying consolidated financial statements. These
reclassifications had no effect on the results of operations or stockholders'
equity as previously reported.
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 six months ended June
30, 1996 and 1995, respectively, are as follows (in millions):
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Six Months Ended
June 30,
------------------------------
1996 1995
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<S> <C> <C>
Income tax provision at the statutory rate $ 31.7 $ 29.6
Effect of:
State income taxes, net of federal income tax effect 2.8 3.0
Investment tax credits included in income (0.9) (1.8)
Other, net (0.3) (1.2)
- ------------------------------------------------------------------------------- --- ------------- -- -------------
Income tax provision $ 33.3 $ 29.6
--- ------------- -- -------------
Effective income tax rate 36.7% 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.
Nearly 90 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, also adopted alternative regulation. 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 10.4 percent and 9.1 percent in the second
quarter and first half of 1996, respectively, over the comparable 1995 periods.
Local service revenues, derived from providing local exchange telephone service,
increased 11.5 percent and 10.4 percent in the second quarter and first half of
1996, respectively, over the comparable 1995 periods. 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
7.0 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
$10 million during the second quarter and first half of 1996, respectively,
relative to the comparable 1995 periods. These increases were 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 $24 million and $39 million in the second quarter
and first half of 1996, respectively, from the comparable 1995 periods. 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 more than offset by an increase in the
costs of providing services resulting from access line growth.
Interest expense decreased $3 million and $4 million in the second quarter and
first half of 1996, respectively, over the comparable 1995 periods. The
decreases were generally due to decreases in average levels of debt outstanding.
The Company's income tax provisions for the first six months of 1996 and 1995
resulted in effective tax rates of 36.7 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 $154 million during the first six months of 1996 compared to
$136 million during the first six months of 1995. The increase in operating cash
flows primarily reflects improved operating results.
The Company's investing activities used cash of $120 million and $175 million
during the first six 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 $186 million
and $117 million during the first six 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 $38 million and provided cash of $40 million
in the first six months of 1996 and 1995, respectively. 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, of $12 million of
first mortgage bonds. The charges incurred in connection with this early
extinguishment were insignificant.
As of June 30, 1996, the Company's total capitalization aggregated $1.13
billion, consisting of 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 53 percent of total
capitalization as of June 30, 1996 compared to 58 percent at year-end 1995.
During 1996, the Company anticipates funding estimated capital expenditures of
$295 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 market
conditions during the year. Additionally, depending on 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 June 30, 1996.
Item 2. Changes in Securities
There were no reportable events during the quarter ended June 30, 1996.
Item 3. Defaults Upon Senior Securities
There were no reportable events during the quarter ended June 30, 1996.
Item 4. Submission of Matters to a Vote of Security Holders
There were no reportable events during the quarter ended June 30, 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 June 30,
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: August 13, 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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<CASH> 4,700
<SECURITIES> 0
<RECEIVABLES> 172,100
<ALLOWANCES> 1,600
<INVENTORY> 0
<CURRENT-ASSETS> 201,900
<PP&E> 2,931,200
<DEPRECIATION> 1,553,900
<TOTAL-ASSETS> 1,604,800
<CURRENT-LIABILITIES> 438,000
<BONDS> 380,700
4,600
2,000
<COMMON> 353,100
<OTHER-SE> 170,700
<TOTAL-LIABILITY-AND-EQUITY> 1,604,800
<SALES> 0
<TOTAL-REVENUES> 534,400
<CGS> 0
<TOTAL-COSTS> 342,700
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 20,600
<INCOME-PRETAX> 90,700
<INCOME-TAX> 33,300
<INCOME-CONTINUING> 57,400
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 57,400
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
