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, 1996
----------------------------------------
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
- - -----------------------------------------------------------------------
(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
- - ------------------------------------------------------------------------
(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
September 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)
September 30, December 31,
1996 1995
------------- ------------
(Unaudited)
ASSETS
CURRENT ASSETS
Cash $ 330 $ 54
Receivables, net of allowance for
doubtful accounts of $3,610
($2,348 in 1995):
Customers and other 113,677 81,710
Interexchange carriers 25,634 25,955
Affiliated companies 10,466 4,920
Inventories 10,667 6,884
Prepaid expenses and other 1,160 1,601
---------- ----------
161,934 121,124
PROPERTY, PLANT AND EQUIPMENT
Land and buildings 138,005 136,486
Telephone network equipment and outside
plant 1,637,216 1,568,154
Other 107,407 93,859
Construction in progress 34,700 19,992
---------- ----------
1,917,328 1,818,491
Less accumulated depreciation 1,041,272 969,389
---------- ----------
876,056 849,102
DEFERRED CHARGES AND OTHER ASSETS 85,640 82,152
---------- ----------
$1,123,630 $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)
September 30, December 31,
1996 1995
------------- ------------
(Unaudited)
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES
Outstanding checks in excess of cash
balances $ 7,417 $ 7,443
Short-term borrowings:
Commercial paper - 42,800
Advances from parent company 134,783 72
Current maturities of long-term debt 16 12,672
Accounts payable:
Vendors and other 16,678 14,532
Interexchange carriers 21,495 20,389
Affiliated companies 17,363 15,883
Accrued taxes 11,711 14,635
Advance billings and customer deposits 17,848 18,178
Accrued vacation pay 10,502 8,916
Other 21,072 17,717
---------- ----------
258,885 173,237
LONG-TERM DEBT 199,414 248,309
DEFERRED CREDITS AND OTHER LIABILITIES
Deferred income taxes 81,399 77,841
Postretirement and other benefit
obligations 60,159 51,824
Other 10,449 13,900
---------- ----------
152,007 143,565
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 75,744 71,991
Retained earnings 365,050 342,746
---------- ----------
513,324 487,267
---------- ----------
$1,123,630 $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 Nine Months Ended
September 30, September 30,
1996 1995 1996 1995
------------------ -----------------
(Unaudited) (Unaudited)
OPERATING REVENUES
Local service $ 91,175 $ 77,180 $259,071 $223,201
Network access service 62,552 56,244 178,664 161,299
Long distance service 14,471 23,597 47,965 73,907
Other 49,593 40,911 140,169 115,025
-------- -------- -------- --------
217,791 197,932 625,869 573,432
OPERATING EXPENSES
Plant expense 59,741 52,266 165,841 160,064
Depreciation 33,528 33,064 101,215 98,364
Customer operations 37,553 31,710 102,686 88,095
Corporate operations 18,229 18,232 53,059 52,322
Other 12,084 10,415 34,231 26,781
Taxes:
Federal income:
Current 12,496 15,182 41,294 43,074
Deferred 3,521 (1,407) 4,854 (5,133)
Deferred investment tax
credits - (547) - (1,657)
State, local and
miscellaneous 8,132 7,988 24,734 23,127
-------- -------- -------- --------
185,284 166,903 527,914 485,037
-------- -------- -------- --------
OPERATING INCOME 32,507 31,029 97,955 88,395
Interest Expense
Short-term borrowings and
long-term debt 3,482 5,453 12,723 15,463
Other 1,669 656 3,770 2,001
-------- -------- -------- --------
5,151 6,109 16,493 17,464
Other Income (Expense)
Interest charged to
construction (881) 230 168 345
Other, net 3,488 4,443 10,863 4,807
-------- -------- -------- --------
2,607 4,673 11,031 5,152
-------- -------- -------- --------
Income before
extraordinary item 29,963 29,593 92,493 76,083
Extraordinary loss on early
extinguishment of debt, net 3,750 - 3,750 -
-------- -------- -------- --------
NET INCOME $ 26,213 $ 29,593 $ 88,743 $ 76,083
======== ======== ======== ========
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,
1996 1995
---------------------------
(Unaudited)
OPERATING ACTIVITIES
Net income $ 88,743 $ 76,083
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 101,215 98,364
Extraordinary loss on early extinguishment
of debt 4,713 -
Deferred income taxes and investment
tax credits 6,008 (7,606)
Changes in operating assets and liabilities:
Receivables, net (37,192) (1,907)
Inventories and other current assets (3,342) 2,746
Accounts payable, accrued expenses
and other current liabilities 6,393 (6,772)
Noncurrent assets and liabilities, net 1,396 10,194
Other, net (2,296) 803
---------- ----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 165,638 171,905
---------- ----------
INVESTING ACTIVITIES
Capital expenditures (126,285) (121,143)
Other, net (1,884) (788)
---------- ----------
NET CASH USED BY INVESTING ACTIVITIES (128,169) (121,931)
---------- ----------
FINANCING ACTIVITIES
Retirements of long-term debt (62,668) (8,543)
Net increase in short-term borrowings 91,911 20,770
Dividends paid (66,439) (62,160)
Other 3 -
---------- ----------
NET CASH USED BY FINANCING ACTIVITIES (37,193) (49,933)
---------- ----------
INCREASE IN CASH 276 41
CASH AT BEGINNING OF PERIOD 54 16
---------- ----------
CASH AT END OF PERIOD $ 330 $ 57
========== ==========
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. NEW SUBSIDIARY - JOINT UNDERGROUND LOCATING SERVICES, INC.
In September 1996, the Company purchased Joint Underground Locating
Services, Inc.(JULS) for $3.8 million from an affiliate, The United Telephone
Company of Pennsylvania. JULS operates a non-regulated line of business
specializing in locating underground utility lines serving in the following
13 states: Indiana, Minnesota, Massachusetts, Missouri, Nebraska, New
Hampshire, New Jersey, New York, Ohio, Oklahoma, Pennsylvania, Texas, and
Wyoming.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The information contained in this Form 10-Q for the three- and nine-month
interim periods ended September 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 nine months ended September 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., JULS, 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.
<PAGE>
Form 10-Q Part I.
Item 1.
CAROLINA TELEPHONE AND TELEGRAPH COMPANY
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Earnings Per Share
- - ------------------
Earnings per share information has been omitted because the Company is a
wholly-owned subsidiary of Sprint Corporation (Sprint).
3. 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):
1996 1995
---- ----
Cash paid for
Interest, net of amounts capitalized $16,839 $16,037
Income taxes 50,968 52,712
4. EARLY EXTINGUISHMENT OF DEBT
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 costs and $1.2 million of debt discount costs. The
extraordinary loss on the early extinguishment of debt is $3.8 million, net
of income tax benefits.
<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 $35.9 million or 16.1 percent for the
nine-month period ended September 30, 1996 compared to the same period in
1995. Basic area service revenues contributed $26.6 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 $7.4
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 $17.4 million or 10.8 percent
for the nine-month period ended September 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 10.2 percent growth in
interstate access minutes and a 10.5 percent growth in intrastate access
minutes.
Long distance service revenues decreased $25.9 million or 35.1 percent
for the nine-month period ended September 30, 1996 compared to the same period
in 1995. Carolina Telephone Long Distance, Inc. experienced a 14.1 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 $25.1 million or 21.9 percent for the nine-month
period ended September 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 increased $5.8 million or 3.6 percent for the nine-month
period ended September 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 more than 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 $14.6 million or 16.6 percent for
the nine-month period ended September 30, 1996 compared to the same period in
1995. NCUS expenses increased $5.3 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 $7.5 million or 27.8 percent for the
nine-month period ended September 30, 1996 compared to the same period in
1995. A portion of this fluctuation was due to a $4.9 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 cellular partnerships after the 1995 transfer, therefore
creating an increase in other operating expenses in 1996.
The other, net, portion of other income increased $6.1 million for the
nine-month period ended September 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 $6.3 million
for the nine-month period ended September 30, 1996 compared to the same period
in 1995, primarily due to increases in accounts receivable and inventories,
partially offset by increases in other current liabilities and improved
operating results in the 1996 period.
Net cash used by investing activities increased $6.2 million for the
nine-month period ended September 30, 1996 compared to the same period in
1995 primarily due to telecommunications plant additions. The Company's
planned construction expenditures for 1996 are $163.7 million.
Net cash used by financing activities decreased $12.7 million for the
nine-month period ended September 30, 1996 compared to the same period in
1995 primarily due to an increase in short-term borrowings, partially offset
by retirements of long-term debt.
As of September 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 September 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 September 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 costs and $1.2 million of debt discount costs. The
extraordinary loss on the early extinguishment of debt is $3.8 million, net
of income tax benefits.
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 60.6 percent
at September 30, 1996 and 61.6 percent at December 31, 1995. The Company's
ratio of long-term debt to total capital was 23.5 percent at September 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
September 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 9.78
and 7.89 for the three months ended and 9.20 and 7.32 for
the nine months ended September 30, 1996 and 1995, 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.
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are filed as part of this report:
(12) Computation of ratio of earnings to fixed charges.
(27) Financial data schedule.
(b) No reports on Form 8-K were filed during the quarter
ended September 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 11-13-96 By s/F. E. Westmeyer
-------- -----------------------------------------
F. E. Westmeyer, Vice President-Finance
(Principal Financial Officer)
Date 11-13-96 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 Nine Months Ending
September 30, September 30,
------------------- ------------------
(Unaudited) (Unaudited)
1996 1995 1996 1995
---- ---- ---- ----
Income before extraordinary
item $ 29,963 $ 29,593 $ 92,493 $ 76,083
Capitalized interest 881 (230) (168) (345)
Income tax provision 19,161 16,405 56,716 45,276
-------- -------- -------- --------
Subtotal 50,005 45,768 149,041 121,014
Fixed charges
Interest charges 5,151 6,109 16,493 17,464
Interest factor of operating
rents 547 531 1,691 1,686
-------- -------- -------- --------
Total fixed charges 5,698 6,640 18,184 19,150
-------- -------- -------- --------
Earnings, as adjusted $ 55,703 $ 52,408 $167,225 $140,164
======== ======== ======== ========
Ratio of earnings to fixed
charges 9.78 7.89 9.20 7.32
======== ======== ======== ========
NOTE: The above 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 component
of operating rents.
<PAGE>
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<PERIOD-START> JAN-01-1996
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0
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