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, 1994
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number: 1-6469
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CAROLINA TELEPHONE AND TELEGRAPH COMPANY
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(Exact name of registrant as specified in its charter)
North Carolina 56-0931189
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
14111 Capital Boulevard, Wake Forest, N.C. 27587
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(Address of principal executive offices) (Zip Code)
919-554-7900
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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)
This registrant meets the conditions set forth in General Instruction
H(1)(a) and (b) of Form 10-Q and is therefore filing this form with the
reduced disclosure format.
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
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There are 3,626,510 shares of common stock, par value $20, outstanding as
of March 31, 1994 and as of the date of filing of this report.
-1-
CAROLINA TELEPHONE AND TELEGRAPH COMPANY
INDEX
Page Reference
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Part I. Financial Information
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets Page 2 - 3
Consolidated Statements of Income Page 4
Consolidated Statements of Cash Flows Pages 5 - 6
Notes to Consolidated Financial Statements Pages 7 - 8
Item 2. Management's Discussion and Analysis
of Financial Condition and Results
of Operations Pages 9 - 12
Part II. Other Information
Item 1. Legal Proceedings Page 13
Item 2. Changes in Securities Page 13
Item 3. Defaults Upon Senior Securities Page 13
Item 4. Submission of Matters to a Vote of
Security Holders Page 13
Item 5. Other Information Page 13
Item 6. Exhibits and Reports on Form 8-K Page 13
Signatures Page 14
Exhibit 12
Form 10-Q Part I.
Item 1.
-2-
CAROLINA TELEPHONE AND TELEGRAPH COMPANY
CONSOLIDATED BALANCE SHEETS
(Thousands of Dollars)
March 31, December 31,
1994 1993
----------- ------------
(Unaudited)
ASSETS
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CURRENT ASSETS
Cash $ 1 $ 1
Receivables, net of allowance for
doubtful accounts of $1,850
($1,895 at December 31, 1993):
Customer and other 62,942 63,090
Interexchange carriers 22,584 20,238
Affiliates 4,659 4,699
Inventories 9,077 9,807
Prepayments and other 548 870
---------- ----------
99,811 98,705
PROPERTY, PLANT AND EQUIPMENT
Land and buildings 129,677 128,635
Telephone network equipment and outside
plant 1,396,448 1,370,948
Other 79,945 78,455
Construction in progress 26,405 17,228
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1,632,475 1,595,266
Less accumulated depreciation 697,221 673,839
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935,254 921,427
DEFERRED CHARGES AND OTHER ASSETS 61,522 58,778
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$1,096,587 $1,078,910
========== ==========
(Continued)
Form 10-Q Part I.
Item 1.
-3-
CAROLINA TELEPHONE AND TELEGRAPH COMPANY
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(Thousands of Dollars)
March 31, December 31,
1994 1993
----------- ------------
(Unaudited)
LIABILITIES AND STOCKHOLDER'S EQUITY
- - ------------------------------------
CURRENT LIABILITIES
Outstanding checks in excess of cash
balances $ 3,830 $ 9,303
Current maturities of long-term debt 573 568
Short-term borrowings:
Commercial paper 24,739 41,100
Accounts payable:
Interexchange carriers 22,235 22,950
Affiliates 19,032 10,866
Vendors and other 36,221 20,742
Advance billings 12,048 11,653
Accrued taxes 21,250 13,298
Accrued merger and integration costs 11,718 17,035
Accrued vacation pay 7,869 10,550
Other 21,245 20,484
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180,760 178,549
LONG-TERM DEBT 269,111 269,087
DEFERRED CREDITS AND OTHER LIABILITIES
Income taxes 113,427 113,399
Investment tax credits 5,845 6,790
Regulatory liability 25,754 26,338
Postretirement and other benefit
obligations 26,035 22,542
Other 10,784 11,919
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181,845 180,988
COMMON STOCK AND OTHER STOCKHOLDER'S EQUITY
Common stock, authorized 5,000,000 shares,
par value $20 per share, issued and
outstanding 3,626,510 shares 72,530 72,530
Capital in excess of par value 71,991 71,991
Retained earnings 320,350 305,765
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464,871 450,286
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$1,096,587 $1,078,910
========== ==========
See Notes to Consolidated Financial Statements.
Form 10-Q Part I.
Item 1.
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CAROLINA TELEPHONE AND TELEGRAPH COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(Thousands of Dollars)
Three Months Ended
March 31,
------------------
1994 1993
---- ----
(Unaudited)
OPERATING REVENUES
Local service $ 67,104 $ 61,464
Network access 48,730 44,598
Long-distance network 27,462 24,623
Miscellaneous 25,292 21,597
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168,588 152,282
OPERATING EXPENSES
Plant expense 51,388 46,104
Depreciation 29,907 28,168
Customer operations 23,153 20,518
Corporate operations 17,368 15,152
Merger and integration costs - 41,700
Other operating expenses 4,836 5,135
Taxes:
Federal income:
Current 11,123 10,641
Deferred (642) (14,989)
Deferred investment tax
credit (945) (1,108)
State, local and
miscellaneous 6,785 2,830
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142,973 154,151
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OPERATING INCOME (LOSS) 25,615 (1,869)
INTEREST CHARGES
Interest on long-term debt 4,791 4,989
Other interest 500 668
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5,291 5,657
OTHER INCOME
Interest charged to
construction 37 16
Other, net 209 46
-------- --------
246 62
-------- --------
NET INCOME (LOSS) $ 20,570 $ (7,464)
======== =========
See Notes to Consolidated Financial Statements.
Form 10-Q Part I.
Item 1.
-5-
CAROLINA TELEPHONE AND TELEGRAPH COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Thousands of Dollars)
Three Months Ended
March 31,
------------------
1994 1993
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(Unaudited)
OPERATING ACTIVITIES
Net income (loss) $ 20,570 $ (7,464)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation 29,907 28,168
Deferred income taxes and investment
tax credits (1,208) (19,627)
Changes in operating assets and liabilities:
Receivables, net (2,158) 716
Inventories 730 (1,072)
Other current assets 322 (46)
Accounts payable 22,930 7,801
Other current liabilities (4,439) 35,018
Noncurrent assets and liabilities, net 1,434 14,749
Other, net (523) 5,684
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NET CASH PROVIDED BY OPERATING ACTIVITIES 67,565 63,927
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INVESTING ACTIVITIES
Additions to property, plant and equipment (43,248) (39,926)
Net salvage (cost) from plant and equipment
retired (486) 30
Additions to investments (1,393) (311)
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NET CASH USED BY INVESTING ACTIVITIES (45,127) (40,207)
---------- ----------
(Continued)
Form 10-Q Part I.
Item 1.
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CAROLINA TELEPHONE AND TELEGRAPH COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(Thousands of Dollars)
Three Months Ended
March 31,
------------------
1994 1993
---- ----
(Unaudited)
FINANCING ACTIVITIES
Retirements of long-term debt $ (51) $ (6,679)
Decrease in commercial paper (16,361) (3,000)
Decrease in advances from parent company - (804)
Dividends paid (5,985) (13,237)
Other (41) -
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NET CASH USED BY FINANCING ACTIVITIES (22,438) (23,720)
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CHANGE IN CASH - -
CASH AT BEGINNING OF PERIOD 1 1
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CASH AT END OF PERIOD $ 1 $ 1
========== ==========
See Notes to Consolidated Financial Statements.
Form 10-Q Part I.
Item 1.
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CAROLINA TELEPHONE AND TELEGRAPH COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. ACCOUNTING POLICIES
The information contained in this Form 10-Q for the three month
periods ended March 31, 1994 and 1993 reflects all adjustments, consisting
only of normal recurring and certain nonrecurring accruals (see note 2)
which are, in the opinion of management, necessary to a fair statement of
the results of operations for such interim periods.
Basis of Presentation
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The consolidated financial statements reflect the operations of
Carolina Telephone and Telegraph Company and its wholly-owned subsidiary,
Carolina Telephone Long Distance, Inc., collectively referred to as the
"Company". All significant intercompany transactions have been
eliminated.
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 1993 net income.
Earnings per Share
- - ------------------
Earnings per share information has been omitted because the Company
is a wholly-owned subsidiary of Sprint Corporation (Sprint).
2. SPRINT/CENTEL MERGER
Effective March 9, 1993, Sprint consummated its merger with Centel
Corporation (Centel), a telecommunications company with local exchange and
cellular/wireless communications services operations. Centel's local
exchange telephone businesses operate in six states: Florida, North
Carolina, Virginia, Illinois, Texas, and Nevada. 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 two companies (consisting primarily of employee
severance and relocation expenses and costs of eliminating duplicative
facilities) resulted in nonrecurring charges to Sprint during 1993. The
portion of such charges attributable to the Company was $46,382,000, of
which $41,700,000 was recorded during the first quarter of 1993. Such
nonrecurring charges reduced the first quarter 1993 net income by
approximately $25,346,000.
Form 10-Q Part I.
Item 1.
-8-
CAROLINA TELEPHONE AND TELEGRAPH COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3. SUPPLEMENTAL CASH FLOW INFORMATION
The following are the supplemental cash flow disclosures for the
three months ended March 31:
Cash Paid For: 1994 1993
---- ----
(Thousands of Dollars)
Interest (net of amounts
capitalized) $5,187 $2,177
Income taxes $ 400 $2,190
Form 10-Q Part I.
Item 2.
-9-
CAROLINA TELEPHONE AND TELEGRAPH COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Liquidity and Capital Resources
- - -------------------------------
Cash flows from operating activities are the Company's primary source
of liquidity. Net cash provided by operating activities increased
$3,638,000 for the three months ending March 31, 1994 compared to the
same period in 1993. The increase was primarily attributable to an
increase in accounts payable due to expenses from the recently formed
service company and increased purchase activity as a result of the
consolidation of the Company and four of its affiliates.
Net cash used by investing activities increased $4,920,000 for the
three months ending March 31, 1994 compared to the same period in 1993.
This increase was impacted by a $3,322,000 increase in telecommunications
plant additions, as well as increases in non-regulated investment
additions. The Company's planned construction expenditures for 1994 are
$143,131,000.
The primary source of financing for the Company has been long-term
debt. In addition, the Company periodically receives cash advances from
Sprint and issues commercial paper and notes payable to banks.
Net cash used by financing activities decreased $1,282,000 for the
three months ending March 31, 1994 compared to the same period in 1993 due
primarily to reduced dividend payments and a decrease in retirements of
long-term borrowings, partially offset by increased payments to reduce
commercial paper.
As of March 31, 1994, the Company had a total of $60,000,000 in one
year bank commitments. The bank lines provide for short-term borrowings
at market rates of interest and require annual commitment fees based on
the unused portion. Such lines of credit, which support commercial paper,
may be withdrawn by the banks if there is a material adverse change in the
financial condition of Sprint or the Company. As of March 31, 1994, no
amounts were borrowed against this credit facility; however, $24,739,000
of the bank line supports the commercial paper outstanding at March 31,
1994.
The Company is also authorized to issue and sell an additional
$75,000,000 in debentures. The debentures must be due within thirty years
of the date of issue and cannot exceed an interest rate of 7.25 percent.
The new debentures, which may be issued and sold in two or more offerings,
will be used primarily to refinance existing debt at lower interest rates.
Form 10-Q Part I.
Item 2.
-10-
CAROLINA TELEPHONE AND TELEGRAPH COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Liquidity and Capital Resources (continued)
- - -------------------------------------------
The Company's ratio of common equity to total capital was 61.2
percent at March 31, 1994 and 59.2 percent at December 31, 1993. The
Company's ratio of long-term debt to total capital was 35.5 percent at
March 31, 1994 and 35.4 percent at December 31, 1993. The Company's ratio
of short-term debt to total capital was 3.3 percent at March 31, 1994 and
5.4 percent at December 31, 1993.
Operating Results
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Local service revenues increased $5,640,000 or 9.2 percent for the
three month period ending March 31, 1994 compared to the same period in
1993. Basic area service revenues contributed $2,199,000 due primarily to
a 5.0 percent and 9.1 percent growth in residence and business access
lines, respectively. Custom calling, telephone instrument leases, and
touch tone features added $2,203,000 as a result of access line gains and
increased marketing promotions.
Network access revenues increased $4,132,000 or 9.3 percent for the
three month period ending March 31, 1994 compared to the same period in
1993. The increase was due primarily to a 14.7 percent growth in
intrastate access minutes and an 11 percent growth in interstate access
minutes.
Long distance network revenues increased $2,839,000 or 11.5 percent
for the three month period ending March 31, 1994 compared to the same
period in 1993. The increase was due primarily to a change in intrastate
intralata settlement methodologies in North Carolina effective January 1,
1994. Effective January 1, 1994, toll revenues are settled under an
originating responsibility plan rather than paid to a pool. The impact of
this change will result in toll revenues increasing approximately $6.5
million and private line revenues increasing approximately $4.5 million
for the year ending December 31, 1994 compared the same period in
1993.
Miscellaneous revenues increased $3,695,000 or 17.1 percent for the
three month period ending March 31, 1994 compared to the same period in
1993. Rent revenues increased $2,178,660 due primarily to the leasing of
the Company's building and other assets to a recently formed affiliated
service company which provides services to the Company and four of its
affiliates. North Carolina Utility Services (NCUS), a non-regulated
business venture specializing in locating underground utility lines,
contributed $1,650,000 due to the expansion of the service area and an
increase of the customer base in existing service areas. These increases
were partially offset by decreased revenues related to a reduction of the
rate of return for interexchange leases to 11.25 percent.
Form 10-Q Part I.
Item 2.
-11-
CAROLINA TELEPHONE AND TELEGRAPH COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Operating Results (continued)
- - -----------------------------
Plant expenses increased $5,284,000 or 11.5 percent for the three
month period ending March 31, 1994 compared to the same period in 1993.
The land and building rent expense increased $1,070,000 due primarily to
the Company's expenses for the use of a portion of the service company's
leased land and buildings. The generic software expense increased
$3,665,000 due to upgrades of digital switches to provide enhanced
services.
Customer operations expenses increased $2,635,000 or 12.8 percent for
the three month period ending March 31, 1994 compared to the same period
in 1993. As a result of continued expansions of its customer base, NCUS
experienced an increase of $1,819,000. Sales, product management, and
advertising expenses increased as the Company continues to intensify its
efforts to achieve an increased market share and gain knowledge of its
customer expectations.
Corporate operations expenses increased $2,216,000 or 14.6 percent
for the three month period ending March 31, 1994 compared to the same
period in 1993. An increase in the network operations expense of
$1,010,000 was due primarily to the increased needs for programming, data
applications, and development of software for mainframes and personal
computers to support the consolidation of the Company and four affiliated
companies within the service company. Also contributing to the increase
were adjustments to employee benefit expenses.
Sprint/Centel Merger
- - --------------------
Effective March 9, 1993, Sprint consummated its merger with Centel
Corporation (Centel), a telecommunications company with local exchange and
cellular/wireless communications services operations. Centel's local
exchange telephone businesses operate in six states: Florida, North
Carolina, Virginia, Illinois, Texas, and Nevada. The operations of the
merged companies continue to be integrated and restructured to achieve
efficiencies which have begun to yield 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 two companies
(consisting primarily of employee severance and relocation expenses and
costs of eliminating duplicative facilities) resulted in nonrecurring
charges to Sprint during 1993. The portion of such charges attributable
to the Company was $46,382,000, of which $41,700,000 was recorded during
the first quarter of 1993. Such nonrecurring charges reduced first
quarter 1993 net income by approximately $25,346,000.
Form 10-Q Part I.
Item 2.
-12-
CAROLINA TELEPHONE AND TELEGRAPH COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Other Matters
- - -------------
Consistent with most local exchange carriers, 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." The application of SFAS No. 71 requires the
accounting recognition of the rate actions of regulators where appropriate,
including the recognition of depreciation based on estimated useful lives
prescribed by regulatory commissions rather than those which might be
utilized by non-regulated enterprises. The Company's management believes
that 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, non-cash charge.
Form 10-Q Part II.
-13-
CAROLINA TELEPHONE AND TELEGRAPH COMPANY
OTHER INFORMATION
Item 1. Legal Proceedings
There were no reportable events during the quarter ended
March 31, 1994.
Item 2. Changes in Securities
Omitted under the provisions of General Instruction H.
Item 3. Defaults Upon Senior Securities
Omitted under the provisions of General Instruction H.
Item 4. Submission of Matters to a Vote of Security Holders
Omitted under the provisions of General Instruction H.
Item 5. Other Information
The Company's ratios of earnings to fixed charges were
6.32 and (0.69) for the three months ending March 31, 1994
and 1993, respectively. These ratios have been computed by
dividing fixed charges into the sum of (a) net income (loss)
less capitalized interest included in income, (b) income
taxes and (c) fixed charges. Fixed charges consist of
interest on all indebtedness (including amortization of debt
issuance expenses) and the interest factor of operating rents.
In the absence of the nonrecurring merger and integration
costs of $41,700,000 recorded during the three months ending
March 31, 1993, the ratio of earnings to fixed charges would
have been 5.95.
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibit is filed as part of this report:
(12) Computation of ratios of earnings to fixed charges.
(b) No reports on Form 8-K were filed during the quarter
ended March 31, 1994.
Form 10-Q Part II.
-14-
CAROLINA TELEPHONE AND TELEGRAPH COMPANY
SIGNATURES
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.
Carolina Telephone and Telegraph Company
----------------------------------------
Registrant
Date 05-13-94 By s/F. E. Westmeyer
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F. E. Westmeyer, Vice President-Finance
(Principal Financial Officer)
Date 05-13-94 By s/T. J. Geller
-------- -----------------------------------------
T. J. Geller, Controller
(Principal Accounting Officer)
Exhibit 12
CAROLINA TELEPHONE AND TELEGRAPH COMPANY
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(Thousands of Dollars)
Three Months Ended
March 31,
------------------
(Unaudited)
1994 1993
---- ----
Net income (loss) $ 20,570 $ (7,464)
Capitalized interest (37) (16)
Income tax provision (benefit) 9,751 (3,125)
-------- --------
Subtotal 30,284 (10,605)
Fixed charges
Interest charges 5,291 5,657
Interest factor of operating rents 400 627
-------- ---------
Total fixed charges 5,691 6,284
-------- ---------
Earnings, as adjusted $ 35,975 $ (4,321)
======== =========
Ratio of earnings to fixed charges 6.32 (0.69) (1)
==== ======
NOTE: The above ratios have been computed by dividing fixed charges
into the sum of (a) net income (loss) less capitalized interest
included in income, (b) income taxes, and (c) fixed charges. Fixed
charges consist of interest on all indebtedness (including amortization
of debt issuance expenses) and the interest component of operating
rents.
(1) Earnings as computed for the ratio of earnings to fixed charges
were inadaquate to cover the fixed charges for the three months
ended March 31, 1993. The amount of the coverage deficiency was
$10,605,000. In the absence of the nonrecurring merger and
integration costs of $41,700,000 recorded during the period, the
ratio of earnings to fixed charges would have been 5.95.
