UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1995
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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
--------------------------------- ---------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
14111 Capital Boulevard, Wake Forest, North Carolina 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 September 30, 1995 and as of the date of filing of this report.
<PAGE>
CAROLINA TELEPHONE AND TELEGRAPH COMPANY
INDEX
Page Reference
--------------
Part I. Financial Information
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets Pages 2 - 3
Consolidated Statements of Income Page 4
Consolidated Statements of Cash Flows Page 5
Condensed Notes to Consolidated
Financial Statements Pages 6 - 7
Item 2. Management's Discussion and Analysis
of Financial Condition and Results
of Operations Pages 8 - 11
Part II. Other Information
Item 1. Legal Proceedings Page 12
Item 2. Changes in Securities Page 12
Item 3. Defaults Upon Senior Securities Page 12
Item 4. Submission of Matters to a Vote of
Security Holders Page 12
Item 5. Other Information Page 12
Item 6. Exhibits and Reports on Form 8-K Page 12
Signatures Page 13
Exhibit 12
Exhibit 27
<PAGE>
Form 10-Q Part I.
Item 1.
CAROLINA TELEPHONE AND TELEGRAPH COMPANY
CONSOLIDATED BALANCE SHEETS
(In Thousands)
September 30, December 31,
1995 1994
------------- ------------
(Unaudited)
ASSETS
CURRENT ASSETS
Cash $ 57 $ 16
Receivables, net of allowance for
doubtful accounts of $2,661
($1,775 in 1994):
Customers and other 87,001 83,597
Interexchange carriers 25,199 24,488
Affiliated companies 3,763 5,971
Inventories 8,512 12,490
Prepaid expenses and other 5,305 4,073
---------- ----------
129,837 130,635
PROPERTY, PLANT AND EQUIPMENT
Land and buildings 136,048 132,610
Telephone network equipment and outside
plant 1,530,135 1,454,632
Other 92,652 86,520
Construction in progress 35,151 28,162
---------- ----------
1,793,986 1,701,924
Less accumulated depreciation 834,668 766,173
---------- ----------
959,318 935,751
DEFERRED CHARGES AND OTHER ASSETS 80,496 72,136
---------- ----------
$1,169,651 $1,138,522
========== ==========
See Accompanying Condensed Notes to Consolidated Financial Statements.
<PAGE>
Form 10-Q Part I.
Item 1.
CAROLINA TELEPHONE AND TELEGRAPH COMPANY
CONSOLIDATED BALANCE SHEETS (continued)
(In Thousands)
September 30, December 31,
1995 1994
------------- ------------
(Unaudited)
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES
Outstanding checks in excess of cash
balances $ 2,986 $ 1,347
Short-term borrowings:
Commercial paper 57,170 33,600
Advances from parent company 10 2,810
Current maturities of long-term debt 12,679 8,579
Accounts payable:
Vendors and other 15,471 19,742
Interexchange carriers 29,900 24,909
Affiliated companies 12,423 15,855
Accrued taxes 17,097 18,396
Advance billings and customer deposits 17,715 19,853
Accrued vacation pay 9,739 8,862
Other 17,198 20,337
---------- ----------
192,388 174,290
LONG-TERM DEBT 248,269 260,736
DEFERRED CREDITS AND OTHER LIABILITIES
Deferred income taxes 105,866 110,489
Deferred investment tax credits 1,477 3,134
Postretirement and other benefit
obligations 51,783 36,539
Other 41,903 39,292
---------- ----------
201,029 189,454
COMMON STOCK AND OTHER STOCKHOLDER'S EQUITY
Common stock, par value $20 per share,
authorized-5,000,000 shares, issued
and outstanding-3,626,510 shares 72,530 72,530
Capital in excess of par value 71,991 71,991
Retained earnings 383,444 369,521
---------- ----------
527,965 514,042
---------- ----------
$1,169,651 $1,138,522
========== ==========
See Accompanying Condensed Notes to Consolidated Financial Statements.
<PAGE>
Form 10-Q Part I.
Item 1.
CAROLINA TELEPHONE AND TELEGRAPH COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
1995 1994 1995 1994
---- ---- ---- ----
(Unaudited) (Unaudited)
OPERATING REVENUES
Local service $ 77,180 $ 71,727 $223,201 $207,716
Network access service 56,244 50,797 161,299 151,040
Long distance service 23,597 26,970 73,907 83,223
Other 40,911 35,504 115,025 92,817
-------- -------- -------- --------
197,932 184,998 573,432 534,796
OPERATING EXPENSES
Plant expense 52,266 51,983 160,064 151,365
Depreciation 33,064 30,427 98,364 90,760
Customer operations 31,710 25,794 88,095 72,173
Corporate operations 18,232 18,500 52,322 52,982
Other 10,415 8,245 26,781 20,954
Taxes:
Federal income:
Current 15,182 10,195 43,074 36,517
Deferred (1,407) 2,490 (5,133) 1,026
Deferred investment tax
credits (547) (765) (1,657) (2,595)
State, local and
miscellaneous 7,988 7,358 23,127 21,917
-------- -------- -------- --------
166,903 154,227 485,037 445,099
-------- -------- -------- --------
OPERATING INCOME 31,029 30,771 88,395 89,697
INTEREST EXPENSE
Short-term borrowings and
long-term debt 5,453 5,352 15,463 15,401
Other 656 289 2,001 882
-------- -------- -------- --------
6,109 5,641 17,464 16,283
OTHER INCOME (EXPENSE)
Interest charged to
construction 230 31 345 102
Other, net 4,443 (597) 4,807 (172)
-------- -------- -------- --------
4,673 (566) 5,152 (70)
-------- -------- -------- --------
NET INCOME $ 29,593 $ 24,564 $ 76,083 $ 73,344
======== ======== ======== ========
See Accompanying Condensed Notes to Consolidated Financial Statements.
<PAGE>
Form 10-Q Part I.
Item 1.
CAROLINA TELEPHONE AND TELEGRAPH COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
Nine Months Ended
September 30,
--------------------------
1995 1994
--------- --------
(Unaudited)
OPERATING ACTIVITIES
Net income $ 76,083 $ 73,344
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 98,364 90,760
Deferred income taxes and investment
tax credits (6,979) (727)
Changes in operating assets and
liabilities:
Receivables, net (1,907) (19,635)
Inventories and other current assets 2,746 (5,113)
Accounts payable, accrued expenses
and other current liabilities (6,772) (1,434)
Noncurrent assets and liabilities, net 14,561 9,708
Other, net (1,731) 194
--------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 174,365 147,097
--------- ---------
INVESTING ACTIVITIES
Capital expenditures (121,143) (123,775)
Dividends received from affiliate 3,064 -
Other, net (6,312) (8,505)
--------- ---------
NET CASH USED BY INVESTING ACTIVITIES (124,391) (132,280)
--------- ---------
FINANCING ACTIVITIES
Retirements of long-term debt (8,543) (168)
Net increase in short-term borrowings 20,770 3,300
Dividends paid (62,160) (17,951)
--------- ---------
NET CASH USED BY FINANCING ACTIVITIES (49,933) (14,819)
--------- ---------
INCREASE (DECREASE)IN CASH 41 (2)
CASH AT BEGINNING OF PERIOD 16 20
--------- ---------
CASH AT END OF PERIOD $ 57 $ 18
========= =========
See Accompanying Condensed Notes to Consolidated Financial Statements.
<PAGE>
Form 10-Q Part I.
Item 1.
CAROLINA TELEPHONE AND TELEGRAPH COMPANY
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The information contained in this Form 10-Q for the three- and nine-month
interim periods ended September 30, 1995 and 1994 has been prepared in
accordance with instructions to Form 10-Q and Rule 10-01 of Regulation S-X.
In the opinion of management, all adjustments considered necessary, consisting
only of normal recurring accruals, to present fairly the consolidated financial
position, results of operations, and cash flows for such interim periods have
been made.
Certain information and footnote disclosures normally included in
consolidated financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted. The results
of operations for the nine months ended September 30, 1995 are not necessarily
indicative of the operating results that may be expected for the year ended
December 31, 1995.
Basis of Presentation
- - ---------------------
The accompanying consolidated financial statements include the accounts
of Carolina Telephone and Telegraph Company and its wholly-owned subsidiaries,
Carolina Telephone Long Distance, Inc. and SC One Company, collectively
referred to as the "Company." All significant intercompany transactions have
been eliminated.
Certain amounts previously reported for prior periods have been
reclassified to conform to the current period presentation in the accompanying
consolidated financial statements. Such reclassifications had no effect on
the results of operations or stockholder's equity as previously reported.
Earnings Per Share
- - ------------------
Earnings per share information has been omitted because the Company is a
wholly-owned subsidiary of Sprint Corporation.
2. SUPPLEMENTAL CASH FLOW INFORMATION
The supplemental disclosures for the consolidated statements of cash
flows for the nine months ended September 30 are as follows (in thousands):
1995 1994
---- ----
Cash paid for
Interest, net of amounts capitalized $ 15,639 $ 14,965
Income taxes 52,712 45,055
During the nine months ended September 30, 1995, the Company transferred
its investments in Rural Service Area cellular partnerships with a total book
value of $30.3 million to its affiliate, Centel Corporation (Centel), in
exchange for preferred stock issued by Centel.
<PAGE>
Form 10-Q Part I.
Item 1.
CAROLINA TELEPHONE AND TELEGRAPH COMPANY
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
3. SUBSEQUENT EVENT
The Company has determined that it no longer meets the criteria necessary
for the continued application of the accounting presribed by Statement of
Financial Accounting Standards (SFAS) No. 71, "Accounting for the Effects of
Certain Types of Regulation." As a result of the discontinued application
of SFAS No. 71, the Company will recognize a noncash, after-tax extraordinary
charge between $40 million and $50 million in the fourth quarter of 1995 to
adjust the net carrying amount of telephone plant in service and to eliminate
regulatory assets and liabilities.
<PAGE>
Form 10-Q Part I.
Item 2.
CAROLINA TELEPHONE AND TELEGRAPH COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations
- - ---------------------
Local service revenues increased $15.5 million or 7.5 percent for the
nine-month period ended September 30, 1995 compared to the same period in
1994. Basic area service revenues contributed $11.3 million to this increase,
primarily attributable to a 4.7 percent growth in access lines and the
implementation of Expanded Local Calling Service (ELCS). ELCS, which includes
exchanges within an approximately 40-mile radius of a central office, allows
customers to choose one of the three local service options that best fits
their personal calling needs. For the same period, custom calling features
added $4.1 million as a result of marketing promotions.
Network access service revenues increased $10.3 million or 6.8 percent
for the nine-month period ended September 30, 1995 compared to the same period
in 1994. The increase was primarily due to a 6.2 percent growth in interstate
access minutes and a 9.3 percent growth in intrastate access minutes.
Long distance service revenues decreased $9.3 million or 11.2 percent
for the nine-month period ended September 30, 1995 compared to the same period
in 1994. Carolina Telephone Long Distance, Inc. experienced a 12.9 percent
decrease in access lines due to aggressive advertising campaigns of its
competitors. In comparing the nine-month period ended September 30, 1995 to
the same period in 1994, $1.6 million of additional revenue was recognized in
1994 related to the Revenue Distribution Plan and intralata compensation
payments. The Revenue Distribution Plan was an interim settlement plan
implemented after the pooling arrangement methodology and before the
originating responsibility plan methodology. The remaining decrease is the
result of the implementation of ELCS, which changed the category of this
revenue from long distance service revenues to local service revenues.
Other revenues increased $22.2 million or 23.9 percent for the nine-month
period ended September 30, 1995 compared to the same period in 1994. The
equipment sales and installation revenue increased $9.8 million. North
Carolina Utility Services (NCUS), a non-regulated line of business
specializing in locating underground utility lines, contributed $10.3 million.
The increase in NCUS revenues reflects an expansion of the service area and
an increase in the customer base in existing service areas, as well as
revenues attributable to Drop Administration Placement, a new line of
business of NCUS specializing in administering the placement of buried
service wires. In May 1994, the Company began providing operator services
for two of its affiliates, Central Telephone Company of Virginia and Central
Telephone Company - North Carolina Division resulting in additional revenue.
Plant expense increased $8.7 million or 5.7 percent for the nine-month
period ended September 30, 1995 compared to the same period in 1994. The
increase was primarily due to increased costs of providing services resulting
from access line growth. The Business Process Improvement initiatives which
began in October 1994 increased network administration expenses. In addition,
<PAGE>
Form 10-Q Part I.
Item 2.
CAROLINA TELEPHONE AND TELEGRAPH COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
Results of Operations (continued)
- - ---------------------------------
generic software expense increased due to upgrades of digital switches to
provide enhanced services. General purpose computer expense also increased,
primarily due to license charges for software.
Depreciation expense increased $7.6 million or 8.4 percent for the
nine-month period ended September 30, 1995 compared to the same period in 1994
as a result of an increase in the average depreciable plant.
Customer operations expense increased $15.9 million or 22.1 percent for
the nine-month period ended September 30, 1995 compared to the same period in
1994. NCUS expenses increased $10.1 million due to the expansion of its
customer base and its new line of business, Drop Administration Placement.
In May 1994, Central Telephone Company - North Carolina Division, an affiliate,
began providing directory assistance services on behalf of the Company,
resulting in additional expenses. Expenses were also incurred during the
1995 period for a new standard marketing billing system which is expected to
be implemented in 1996.
Other operating expenses increased $5.8 million or 27.8 percent for the
nine-month period ended September 30, 1995 compared to the same period in
1994. This fluctuation was due to a $6.6 million increase in cost of
equipment sales, generally correlating with the overall trend in equipment
sales. This increase was partially offset by improved operating results
associated with nonregulated activities.
Other income increased $5.2 million for the nine-month period ended
September 30, 1995 compared to the same period in 1994. This increase was
primarily due to the transfer of the Company's investments in Rural Service
Area cellular partnerships to its affiliate, Centel, in exchange for preferred
stock issued by Centel. The Company receives dividends on the Centel
preferred stock.
Liquidity and Capital Resources
- - -------------------------------
Cash flows from operating activities are the Company's primary source of
liquidity. Net cash provided by operating activities increased $27.3 million
for the nine-month period ended September 30, 1995 compared to the same period
in 1994 primarily due to improved operating results and an increase in
noncurrent liabilities in the 1995 period as well as increased accounts
receivable in the 1994 period.
Net cash used by investing activities decreased $7.9 million for the
nine-month period ended September 30, 1995 compared to the same period in
1994. This decrease was impacted by reductions in telecommunications plant
additions and non-regulated investment additions. The Company's planned
<PAGE>
Form 10-Q Part I.
Item 2.
CAROLINA TELEPHONE AND TELEGRAPH COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
Liquidity and Capital Resources (continued)
- - -------------------------------------------
construction expenditures for 1995 are $141.5 million. The decrease in
non-regulated investment additions was due to the Company's transfer of its
investments in cellular partnerships to an affiliate, as described in Note 2
to the Consolidated Financial Statements. Also contributing to the decrease
in cash used by investing activities were the dividends received on the
Centel preferred stock obtained in exchange for the cellular investments.
Net cash used by financing activities increased $35.1 million for the
nine-month period ended September 30, 1995 compared to the same period in
1994 primarily due to an increase in retirements of long-term debt and an
increase in dividend payments, partially offset by an increase in short-term
borrowings.
As of September 30, 1995, 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 Corporation or the Company. As of September 30, 1995, no
amounts were borrowed against this credit facility; however, $57.2 million of
the bank lines supported commercial paper outstanding at September 30, 1995.
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.
The Company's ratio of common equity to total capital was 62.4 percent
at September 30, 1995 and 62.7 percent at December 31, 1994. The Company's
ratio of long-term debt to total capital was 30.8 percent at September 30,
1995 and 32.9 percent at December 31, 1994.
Accounting Developments
- - -----------------------
The Company has historically accounted 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 that might be utilized by non-regulated
enterprises.
The Company has determined that it no longer meets the criteria necessary
for the continued application of the accounting prescribed by SFAS No. 71.
The Company's determination was based on changes in the regulatory framework,
<PAGE>
Form 10-Q Part I.
Item 2.
CAROLINA TELEPHONE AND TELEGRAPH COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
Accounting Developments (continued)
- - -----------------------------------
which continues to evolve from rate-base regulation to price regulation
which does not provide for the recovery of specific costs. In addition,
with technological changes and the convergence of competition in the
telecommunications industry, the levels and types of competition are
increasing such that service and product pricing prescribed by the
regulator may no longer provide for the recovery of specific costs.
As a result of the discontinued application of SFAS No. 71, the Company,
for financial reporting purposes, is required to eliminate its regulatory
assets and liabilities and adjust the carrying amounts of its telephone plant
in service to the extent that it determines that such amounts are either
overstated as a result of the regulatory process, or are not recoverable.
Accordingly, the Company will recognize a non-cash, after-tax extraordinary
charge between $40 million and $50 million in the fourth quarter of 1995 to
adjust the net carrying amounts of telephone plant in service and to
eliminate regulatory assets and liabilities.
<PAGE>
Form 10-Q Part II.
CAROLINA TELEPHONE AND TELEGRAPH COMPANY
OTHER INFORMATION
Item 1. Legal Proceedings
There were no reportable events during the quarter ended
September 30, 1995.
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 7.89
and 7.62 for the three months ended and 7.32 and 7.77 for the
nine months ended September 30, 1995, and 1994, respectively.
These 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 factor of operating
rents.
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are filed as part of this report:
(12) Computation of ratios of earnings to fixed charges.
(27) Financial data schedule.
(b) No reports on Form 8-K were filed during the quarter
ended September 30, 1995.
<PAGE>
Form 10-Q Part II.
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 11-14-95 By s/F. E. Westmeyer
-------- ----------------------------------------
F. E. Westmeyer, Vice President-Finance
(Principal Financial Officer)
Date 11-14-95 By s/T. J. Geller
-------- ----------------------------------------
T. J. Geller, Controller
(Principal Accounting Officer)
<PAGE>
Exhibit 12
CAROLINA TELEPHONE AND TELEGRAPH COMPANY
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(Thousands of Dollars)
Three Months Ending Nine Months Ending
September 30, September 30,
------------------- ------------------
(Unaudited) (Unaudited)
1995 1994 1995 1994
---- ---- ---- ----
Net income $ 29,593 $ 24,564 $ 76,083 $ 73,344
Capitalized interest (230) (31) (345) (102)
Income tax provision 16,405 14,921 45,276 44,093
------- ------- ------- -------
Subtotal 45,768 39,454 121,014 117,335
Fixed charges
Interest charges 6,109 5,641 17,464 16,283
Interest factor of operating
rents 531 320 1,686 1,048
------- ------- ------- -------
Total fixed charges 6,640 5,961 19,150 17,331
------- ------- ------- -------
Earnings, as adjusted $ 52,408 $ 45,415 $140,164 $134,666
======= ======= ======= =======
Ratio of earnings to fixed
charges 7.89 7.62 7.32 7.77
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.
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<PERIOD-START> JAN-01-1995
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<OTHER-SE> 455435
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