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, 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
----- -----
There are 3,626,510 shares of common stock, par value $20, outstanding as
of June 30, 1994 and as of the date of filing of this report.
-1-
CAROLINA TELEPHONE AND TELEGRAPH COMPANY
INDEX
Page Reference
--------------
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)
June 30, December 31,
1994 1993
------------ ------------
(Unaudited)
ASSETS
- - - ------
CURRENT ASSETS
Cash $ 1 $ 1
Receivables, net of allowance for
doubtful accounts of $2,035
($1,895 at December 31, 1993):
Customer and other 70,913 63,090
Interexchange carriers 22,603 20,238
Affiliates 7,006 4,699
Inventories 11,843 9,807
Prepayments and other 2,309 870
---------- ----------
114,675 98,705
PROPERTY, PLANT AND EQUIPMENT
Land and buildings 130,998 128,635
Telephone network equipment and outside
plant 1,423,698 1,370,948
Other 84,266 78,455
Construction in progress 39,318 17,228
---------- ----------
1,678,280 1,595,266
Less accumulated depreciation 720,200 673,839
---------- ----------
958,080 921,427
DEFERRED CHARGES AND OTHER ASSETS 64,774 58,778
---------- ----------
$1,137,529 $1,078,910
========== ==========
(Continued)
Form 10-Q Part I.
Item 1.
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CAROLINA TELEPHONE AND TELEGRAPH COMPANY
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(Thousands of Dollars)
June 30, December 31,
1994 1993
------------ ------------
(Unaudited)
LIABILITIES AND STOCKHOLDER'S EQUITY
- - - ------------------------------------
CURRENT LIABILITIES
Outstanding checks in excess of cash
balances $ 8,010 $ 9,303
Current maturities of long-term debt 569 568
Short-term borrowings:
Commercial paper 41,300 41,100
Accounts payable:
Interexchange carriers 23,410 22,950
Affiliates 26,187 10,866
Vendors and other 28,345 20,742
Advance billings 12,156 11,653
Accrued taxes 18,645 13,298
Accrued merger and integration costs 7,074 17,035
Accrued vacation pay 8,081 10,550
Other 24,139 20,484
---------- ----------
197,916 178,549
LONG-TERM DEBT 269,122 269,087
DEFERRED CREDITS AND OTHER LIABILITIES
Income taxes 112,888 113,399
Investment tax credits 4,960 6,790
Regulatory liability 25,171 26,338
Postretirement and other benefit
obligations 29,601 22,542
Other 10,773 11,919
---------- ----------
183,393 180,988
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 342,577 305,765
---------- ----------
487,098 450,286
---------- ----------
$1,137,529 $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 Six Months Ended
June 30, June 30,
------------------ ----------------
1994 1993 1994 1993
---- ---- ---- ----
(Unaudited) (Unaudited)
OPERATING REVENUES
Local service $ 68,885 $ 64,067 $135,989 $125,531
Network access 51,513 45,651 100,243 90,249
Long-distance network 29,992 25,475 57,454 50,098
Miscellaneous 30,820 24,563 56,112 46,160
-------- -------- -------- --------
181,210 159,756 349,798 312,038
OPERATING EXPENSES
Plant expense 47,994 50,020 99,382 96,124
Depreciation 30,426 28,601 60,333 56,769
Customer operations 23,226 21,887 46,379 42,405
Corporate operations 17,114 15,276 34,482 30,428
Merger and integration costs - - - 41,700
Other operating expenses 7,873 6,303 12,709 11,438
Taxes:
Federal income:
Current 15,199 7,098 26,322 17,739
Deferred (822) 1,531 (1,464) (13,458)
Deferred investment tax
credits (885) (1,055) (1,830) (2,163)
State, local and
miscellaneous 7,774 6,200 14,559 9,030
-------- -------- -------- --------
147,899 135,861 290,872 290,012
-------- -------- -------- --------
OPERATING INCOME 33,311 23,895 58,926 22,026
INTEREST CHARGES
Interest on long-term debt 4,742 4,775 9,533 9,764
Other interest 609 754 1,109 1,422
-------- -------- -------- --------
5,351 5,529 10,642 11,186
OTHER INCOME
Interest charged to
construction 34 9 71 25
Other, net 216 61 425 107
-------- -------- -------- --------
250 70 496 132
-------- -------- -------- --------
INCOME BEFORE EXTRAORDINARY ITEM 28,210 18,436 48,780 10,972
EXTRAORDINARY LOSSES ON EARLY
EXTINGUISHMENTS OF DEBT, NET - 1,366 - 1,366
-------- -------- -------- --------
NET INCOME $ 28,210 $ 17,070 $ 48,780 $ 9,606
======== ======== ======== ========
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)
Six Months Ended
June 30,
------------------
1994 1993
---- ----
(Unaudited)
OPERATING ACTIVITIES
Net income $ 48,780 $ 9,606
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 60,333 56,769
Extraordinary losses on early extinguishments
of debt - 2,247
Deferred income taxes and investment
tax credits (2,958) (18,517)
Changes in operating assets and liabilities:
Receivables, net (12,495) (6,338)
Inventories (2,036) 39
Other current assets (1,439) 493
Accounts payable 23,384 14,666
Other current liabilities (4,333) 14,621
Noncurrent assets and liabilities, net 5,000 8,931
Other, net (2,063) 2,899
--------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 112,173 85,416
--------- ---------
INVESTING ACTIVITIES
Additions to property, plant and equipment (95,891) (88,662)
Net salvage (cost) from plant and equipment
retired (1,095) 145
Additions to investments (3,294) (1,690)
Increase in advances to parent company - (1,378)
--------- ---------
NET CASH USED BY INVESTING ACTIVITIES (100,280) (91,585)
--------- ---------
(Continued)
Form 10-Q Part I.
Item 1.
-6-
CAROLINA TELEPHONE AND TELEGRAPH COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(Thousands of Dollars)
Six Months Ended
June 30,
-----------------
1994 1993
---- ----
(Unaudited)
FINANCING ACTIVITIES
Proceeds from long-term borrowings $ - $ 50,000
Retirements of long-term debt (84) (63,154)
Increase in commercial paper 200 4,300
Increase in notes payable to banks - 43,200
Decrease in advances from parent company - (1,703)
Dividends paid (11,968) (26,474)
Other (41) -
--------- ---------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES (11,893) 6,169
--------- ---------
CHANGE IN CASH - -
CASH AT BEGINNING OF PERIOD 1 1
--------- ---------
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 and six
month periods ended June 30, 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
- - - ---------------------
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 $46.4 million, of
which $41.7 million was recorded during the first six months of 1993.
Such nonrecurring charges reduced net income for the first six months of
1993 by approximately $25.3 million.
Form 10-Q Part I.
Item 1.
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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 six
months ended June 30:
Cash Paid For: 1994 1993
---- ----
(Thousands of Dollars)
Interest (net of amounts
capitalized) $11,455 $11,109
Income taxes $22,657 $24,023
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 $26.8
million for the six months ending June 30, 1994 compared to the same period
in 1993. The increase was primarily attributable to improved operating
results. Also contributing to the increase was 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
administrative functions of the Company and four of its affiliates.
Net cash used by investing activities increased $8.7 million for the
six months ending June 30, 1994 compared to the same period in 1993. This
increase was primarily impacted by a $7.2 million increase in
telecommunications plant additions, as well as increases in non-regulated
investment additions. The Company's planned construction expenditures for
1994 are $143.1 million.
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
provided by financing activities decreased $18.1 million for the six
months ending June 30, 1994 compared to the same period in 1993 primarily
due to reduced short-term debt borrowings, partially offset by a reduction
in dividend payments and a decrease in long-term debt requirements.
As of June 30, 1994, the Company had a total of $60 million 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 June 30, 1994, no
amounts had been borrowed against this credit facility; however, $41.3
million of the bank line supports the commercial paper outstanding at June
30, 1994.
The Company is also authorized to issue and sell an additional $75
million 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.
When issued, 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.
The Company's ratio of common equity to total capital was 61.0
percent at June 30, 1994 and 59.2 percent at December 31, 1993. The
Company's ratio of long-term debt to total capital was 33.8 percent at
June 30, 1994 and 35.4 percent at December 31, 1993. The Company's ratio
of short-term debt to total capital was 5.2 percent at June 30, 1994 and
5.4 percent at December 31, 1993.
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)
Operating Results
- - - -----------------
Local service revenues increased $10.5 million or 8.3 percent for the
six month period ended June 30, 1994 compared to the same period in 1993.
Basic area service revenues contributed $4.4 million, primarily due to a
5.1 percent growth in access lines. For the same period, custom calling,
telephone instrument leases, service connections, and touch tone features
added $5.3 million as a result of access line gains and increased
marketing promotions.
Network access revenues increased $10.0 million or 11.1 percent for
the six month period ended June 30, 1994 compared to the same period in
1993. The increase was primarily due to a 12.6 percent growth in
intrastate access minutes and an 8.2 percent growth in interstate access
minutes.
Long distance network revenues increased $7.4 million or 14.7 percent
for the six month period ended June 30, 1994 compared to the same period
in 1993. The increase was primarily due 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 a pool arrangement.
Miscellaneous revenues increased $10.0 million or 21.6 percent for
the six month period ended June 30, 1994 compared to the same period in
1993. Rent revenues increased $3.7 million, primarily due 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 nonregulated
business venture specializing in locating underground utility lines,
contributed $4.8 million due to the expansion of the service area and an
increase in the customer base in existing service areas. The increase in
miscellaneous revenues was also due to an increase in equipment sales
revenues, related principally to key systems, data terminal, and data
communications equipment.
Plant expenses increased $3.3 million or 3.4 percent for the six
month period ended June 30, 1994 compared to the same period in 1993. The
land and building rent expense increased $2.1 million, primarily due 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 $0.7
million due to upgrades of digital switches to provide enhanced services.
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)
- - - ----------------------------
Customer operations expenses increased $4.0 million or 9.4 percent
for the six month period ended June 30, 1994 compared to the same period
in 1993. As a result of continued expansions of its customer base, NCUS
experienced an increase of $3.8 million.
Corporate operations expenses increased $4.1 million or 13.3 percent
for the six month period ended June 30, 1994 compared to the same period
in 1993. An increase in the network operations expense of $1.2 million
was primarily due to the increased needs for programming, data
applications, and development of software for mainframes and personal
computers to support the consolidation of the administrative functions of
the Company and four affiliated companies within the service company.
Also contributing to the increase were adjustments to employee benefit
expenses of $2.5 million.
Sprint/Centel Merger
- - - --------------------
Effective March 9, 1993, Sprint consummated its merger with 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 $46.4 million, of which $41.7 million was recorded
during the first six months of 1993. Such nonrecurring charges reduced
net income for the first six months of 1993 by approximately $25.3
million.
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
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 (continued)
- - - ------------------------
based on the 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
June 30, 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 9.38
and 5.69 for the three months ended and 7.85 and 2.17 for
the six months ended June 30, 1994 and 1993, respectively.
These ratios have been computed by dividing fixed charges
into the sum of (a) income before extraordinary item 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 $41.7 million recorded during the first quarter of 1993,
the ratio of earnings to fixed charges would have been 5.56
for the six months ended June 30, 1993.
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 June 30, 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 08-12-94 By s/F. E. Westmeyer
-------- -------------------------------------------
F. E. Westmeyer, Vice President-Finance
(Principal Financial Officer)
Date 08-12-94 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 Ending Six Months Ending
June 30, June 30,
------------------- -----------------
(Unaudited) (Unaudited)
1994 1993 1994 1993
---- ---- ---- ----
Income before extraordinary
item $ 28,210 $ 18,436 $ 48,780 $ 10,972
Capitalized interest (34) (9) (71) (25)
Income tax provision 19,421 9,876 29,172 3,455
-------- -------- -------- --------
Subtotal 47,597 28,303 77,881 14,402
Fixed charges
Interest charges 5,351 5,529 10,642 11,186
Interest factor of operating
rents 328 512 728 1,119
-------- -------- -------- --------
Total fixed charges 5,679 6,041 11,370 12,305
-------- -------- -------- --------
Earnings, as adjusted $ 53,276 $ 34,344 $ 89,251 $ 26,707
======== ======== ======== ========
Ratio of earnings to fixed
charges 9.38 5.69 7.85 2.17 (1)
======== ======== ======== ========
NOTE: The above ratios have been computed by dividing fixed charges into
the sum of (a) net income 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) Net income for the six months ended June 30, 1993 included non-
recurring costs associated with the merger and integration of Sprint
and Centel. The portion of such charge attributable to the Company
was $41.7 million, which reduced net income for the first six months
of 1993 by $25.3 million. In the absence of the nonrecurring merger
and integration costs recorded during the first quarter of 1993, the
ratio of earnings to fixed charges would have been 5.56 for the six
months ended June 30, 1993.
