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: 1-6469
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CAROLINA TELEPHONE AND TELEGRAPH COMPANY
- - ---------------------------------------------------------------------------
(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
- - ---------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
919-554-7900
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(Registrant's telephone number, including area code)
- - ---------------------------------------------------------------------------
(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, 1996 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 - 10
Part II. Other Information
Item 1. Legal Proceedings Page 11
Item 2. Changes in Securities Page 11
Item 3. Defaults Upon Senior Securities Page 11
Item 4. Submission of Matters to a Vote of
Security Holders Page 11
Item 5. Other Information Page 11
Item 6. Exhibits and Reports on Form 8-K Page 11
Signatures Page 12
Exhibit 12
Exhibit 27
<PAGE>
Form 10-Q Part I.
Item 1.
CAROLINA TELEPHONE AND TELEGRAPH COMPANY
CONSOLIDATED BALANCE SHEETS
(In Thousands)
June 30, December 31,
1996 1995
------------ ------------
(Unaudited)
ASSETS
CURRENT ASSETS
Cash $ 93 $ 54
Receivables, net of allowance for
doubtful accounts of $2,909
($2,348 in 1995):
Customers and other 98,466 81,710
Interexchange carriers 24,792 25,955
Affiliated companies 6,097 4,920
Inventories 11,037 6,884
Prepaid expenses and other 1,294 1,601
--------- ---------
141,779 121,124
PROPERTY, PLANT AND EQUIPMENT
Land and buildings 137,390 136,486
Telephone network equipment and outside
plant 1,615,295 1,568,154
Other 102,023 93,859
Construction in progress 40,290 19,992
--------- ---------
1,894,998 1,818,491
Less accumulated depreciation 1,023,232 969,389
--------- ---------
871,766 849,102
DEFERRED CHARGES AND OTHER ASSETS 87,581 82,152
--------- ---------
$1,101,126 $1,052,378
========= =========
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)
June 30, December 31,
1996 1995
------------ ------------
(Unaudited)
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES
Outstanding checks in excess of cash
balances $ 6,478 $ 7,443
Short-term borrowings:
Commercial paper - 42,800
Advances from parent company 79,361 72
Current maturities of long-term debt 44 12,672
Accounts payable:
Vendors and other 16,655 14,532
Interexchange carriers 18,861 20,389
Affiliated companies 15,834 15,883
Accrued taxes 7,975 14,635
Advance billings and customer deposits 18,296 18,178
Accrued vacation pay 9,875 8,916
Other 21,093 17,717
--------- ---------
194,472 173,237
LONG-TERM DEBT 248,419 248,309
DEFERRED CREDITS AND OTHER LIABILITIES
Deferred income taxes 79,868 77,841
Postretirement and other benefit
obligations 57,322 51,824
Other 11,758 13,900
--------- ---------
148,948 143,565
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 364,766 342,746
--------- ---------
509,287 487,267
--------- ---------
$1,101,126 $1,052,378
========= =========
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 Six Months Ended
June 30, June 30,
------------------ ----------------
1996 1995 1996 1995
---- ---- ---- ----
(Unaudited) (Unaudited)
OPERATING REVENUES
Local service $ 86,019 $ 74,511 $167,896 $146,021
Network access service 58,656 53,299 116,112 105,055
Long distance service 14,550 25,166 33,494 50,310
Other 51,002 39,553 90,576 74,114
------- ------- ------- -------
210,227 192,529 408,078 375,500
OPERATING EXPENSES
Plant expense 54,370 52,837 106,100 107,798
Depreciation 34,267 33,130 67,687 65,300
Customer operations 33,652 29,869 65,133 56,385
Corporate operations 17,063 17,353 34,830 34,090
Other 13,297 8,878 22,147 16,366
Taxes:
Federal income:
Current 15,072 12,931 28,798 27,892
Deferred 356 (136) 1,333 (3,726)
Deferred investment tax
credits - (564) - (1,110)
State, local and
miscellaneous 8,400 7,741 16,602 15,139
------- ------- ------- -------
176,477 162,039 342,630 318,134
------- ------- ------- -------
OPERATING INCOME 33,750 30,490 65,448 57,366
Interest Expense
Short-term borrowings and
long-term debt 4,511 5,172 9,241 10,010
Other 1,102 857 2,101 1,345
------- ------- ------- -------
5,613 6,029 11,342 11,355
Other Income
Interest charged to
construction 610 61 1,049 115
Other, net 3,666 184 7,375 364
------- ------- ------- -------
4,276 245 8,424 479
------- ------- ------- -------
NET INCOME $ 32,413 $ 24,706 $ 62,530 $ 46,490
======= ======= ======= =======
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)
Six Months Ended
June 30,
--------------------
1996 1995
---- ----
(Unaudited)
OPERATING ACTIVITIES
Net income $ 62,530 $ 46,490
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 67,687 65,300
Deferred income taxes and investment
tax credits 2,097 (5,441)
Changes in operating assets and
liabilities:
Receivables, net (16,770) 3,586
Inventories and other current assets (3,675) 1,983
Accounts payable, accrued expenses
and other current liabilities (2,626) (5,222)
Noncurrent assets and liabilities, net (2,073) 3,658
Other, net (123) (127)
--------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 107,047 110,227
--------- ---------
INVESTING ACTIVITIES
Capital expenditures (89,037) (92,071)
Other, net (1,314) (580)
--------- ---------
NET CASH USED BY INVESTING ACTIVITIES (90,351) (92,651)
--------- ---------
FINANCING ACTIVITIES
Retirements of long-term debt (12,636) (8,510)
Net increase in short-term borrowings 36,489 43,090
Dividends paid (40,510) (52,151)
--------- ---------
NET CASH USED BY FINANCING ACTIVITIES (16,657) (17,571)
--------- ---------
INCREASE IN CASH 39 5
CASH AT BEGINNING OF PERIOD 54 16
--------- ---------
CASH AT END OF PERIOD $ 93 $ 21
========= ==========
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 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.
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.
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.
Certain amounts previously reported for the prior period 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 (Sprint).
<PAGE>
Form 10-Q Part I.
Item 1.
CAROLINA TELEPHONE AND TELEGRAPH COMPANY
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
2. SUPPLEMENTAL CASH FLOW INFORMATION
The supplemental disclosures for the consolidated statements of cash
flows for the six months ended June 30 are as follows (in thousands):
1996 1995
---- ----
Cash paid for
Interest, net of amounts capitalized $11,090 $11,097
Income taxes 37,842 38,091
3. SUBSEQUENT EVENT
In July 1996, the Company redeemed $50 million of debentures with an
interest rate of 9.0 percent prior to scheduled maturity. In connection with
this early extinguishment of debt there was a $6.8 million charge. This
charge consisted of $2.1 million of prepayment penalty, $3.5 million write-off
of related debt issuance costs and $1.2 million of debt discount costs.
<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
- - ---------------------
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." 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. It is not expected that the discontinued application of SFAS
No. 71 will have a significant impact on 1996 operating results.
Local service revenues increased $21.9 million or 15.0 percent for the
six-month period ended June 30, 1996 compared to the same period in 1995.
Basic area service revenues contributed $16.5 million to this increase,
primarily attributable to a 5.0 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 three local service options that best fits their
personal calling needs. The implementation of ELCS changed the category of
this revenue from long distance service revenues to local service revenues.
For the same period, revenue from custom calling features increased $3.7
million as a result of access line gains and marketing promotions. Translink,
Digilink, and the North Carolina Information Highway project contributed to
an increase in local private line revenues. Translink is an interexchange
digital channel service which provides access transport between a customer's
premises and the local serving office on a channelized basis over a
high-capacity digital facility. Digilink is a digital transmission service
designed to transmit signals, end to end, over digital facilities routed
through central offices. As part of the North Carolina Information Highway
project, the Company is providing equipment to the state government to
provide link-up capabilities for different schools and institutions.
Network access service revenues increased $11.1 million or 10.5 percent
for the six-month period ended June 30, 1996 compared to the same period in
1995. The increase was primarily the result of interstate access revenue
true-ups for prior periods as well as a 10.7 percent growth in interstate
access minutes and a 9.9 percent growth in intrastate access minutes.
Long distance service revenues decreased $16.8 million or 33.4 percent
for the six-month period ended June 30, 1996 compared to the same period in
1995. Carolina Telephone Long Distance, Inc. experienced a 13.9 percent
decrease in access lines due to aggressive advertising campaigns of its
competitors. 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.
<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)
- - ---------------------------------
Other revenues increased $16.5 million or 22.2 percent for the six-month
period ended June 30, 1996 compared to the same period in 1995. The increase
primarily represents increases in equipment sales and installation revenue,
general support asset rent revenue, and revenue from North Carolina Utility
Services (NCUS), a non-regulated line of business specializing in locating
underground utility lines. 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.
Plant expense decreased $1.7 million or 1.6 percent for the six-month
period ended June 30, 1996 compared to the same period in 1995. In
conjunction with the adoption of accounting principles for a competitive
marketplace, switch software costs which had previously been expensed as
incurred are now being capitalized and amortized, which resulted in a
decrease in plant expense. This decrease was partially offset by increases
in both furniture and general purpose computer expenses and expenses for a
new automated outside plant mapping and facilities management system.
Customer operations expense increased $8.7 million or 15.5 percent for
the six-month period ended June 30, 1996 compared to the same period in 1995.
NCUS expenses increased $3.4 million due to the expansion of its customer
base and its new line of business, Drop Administration Placement. Sales
expenses increased as the Company continues to intensify its efforts to
achieve an increased market share and gain knowledge of its customer
expectations. Customer operations expense also reflects increased resources
in business office operations required to meet customer demands and
developmental expenses incurred for a new standard marketing billing system
which is expected to be implemented in 1997.
Other operating expenses increased $5.8 million or 35.3 percent for the
six-month period ended June 30, 1996 compared to the same period in 1995. A
portion of this fluctuation was due to a $3.4 million increase in cost of
equipment sales, generally correlating with the overall trend in equipment
sales. The remainder of the increase was due to the Company transferring its
investment in Rural Service Area cellular partnerships in 1995 to its
affiliate, Centel Corporation (Centel), in exchange for preferred stock issued
by Centel. Net income was no longer received from Rural Service Area
partnerships after the 1995 transfer, therefore creating an increase in other
operating expenses in 1996.
The other, net portion of other income increased $7.0 million for the
six-month period ended June 30, 1996 compared to the same period in 1995. In
1995, the Company transferred its investment in Rural Service Area cellular
partnerships to its affiliate, Centel, in exchange for preferred stock
issued by Centel. This increase in other income was primarily due to
dividends received on the Centel preferred stock.
<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
- - -------------------------------
Cash flows from operating activities are the Company's primary source of
liquidity. Net cash provided by operating activities decreased $3.2 million
for the six-month period ended June 30, 1996 compared to the same period in
1995, primarily due to increases in accounts receivable and inventories,
partially offset by improved operating results in the 1996 period.
Net cash used by investing activities decreased $2.3 million for the
six-month period ended June 30, 1996 compared to the same period in 1995.
This decrease was impacted by a reduction in telecommunications plant
additions. The Company's planned construction expenditures for 1996 are
$163.7 million.
Net cash used by financing activities decreased $0.9 million for the
six-month period ended June 30, 1996 compared to the same period in 1995
primarily due to a decrease in dividend payments, partially offset by greater
retirements of long-term debt and lesser increases in short-term borrowings.
As of June 30, 1996, the Company had a total of $31 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, 1996, no amounts were
borrowed against this credit facility. Currently, all borrowing transactions
are made with the parent company; therefore, no commercial paper was
outstanding at June 30, 1996.
In July 1996, the Company redeemed $50 million of debentures with an
interest rate of 9.0 percent prior to scheduled maturity. In connection with
this early extinguishment of debt there was a $6.8 million charge. This
charge consisted of $2.1 million of prepayment penalty, $3.5 million write-off
of related debt issuance costs and $1.2 million of debt discount costs.
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 60.8 percent
at June 30, 1996 and 61.6 percent at December 31, 1995. The Company's ratio
of long-term debt to total capital was 29.7 percent at June 30, 1996 and 33.0
percent at December 31, 1995.
<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
June 30, 1996.
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 9.27
and 7.03 for the three months ended and 8.93 and 7.01 for
the six months ended June 30, 1996 and 1995, 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 June 30, 1996.
<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 8-12-96 By s/F. E. Westmeyer
------- ----------------------------------------
F. E. Westmeyer, Vice President-Finance
(Principal Financial Officer)
Date 8-12-96 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 Six Months Ending
June 30, June 30,
------------------- -----------------
(Unaudited) (Unaudited)
1996 1995 1996 1995
---- ---- ---- ----
Net income $ 32,413 $ 24,706 $ 62,530 $ 46,490
Capitalized interest (610) (61) (1,049) (115)
Income tax provision 19,025 15,275 37,555 28,871
------- ------- ------- -------
Subtotal 50,828 39,920 99,036 75,246
Fixed charges
Interest charges 5,613 6,029 11,342 11,355
Interest factor of operating
rents 536 592 1,144 1,155
------- ------- ------- -------
Total fixed charges 6,149 6,621 12,486 12,510
------- ------- ------- -------
Earnings, as adjusted $ 56,977 $ 46,541 $111,522 $ 87,756
======= ======= ======= =======
Ratio of earnings to fixed
charges 9.27 7.03 8.93 7.01
==== ==== ==== ====
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.
<PAGE>
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