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, 1997
-------------------------------
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
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
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(Address of principal executive offices)
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 of 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, and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No ___
There are no equity securities held by non-affiliates.
There are 3,626,510 shares of common stock outstanding as of June 30, 1997 and
as of the date of filing of this report.
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CAROLINA TELEPHONE AND TELEGRAPH COMPANY
FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 1997
INDEX
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Page
Part I - Financial Information
Item 1. Consolidated Financial Statements
<S> <C>
Consolidated Balance Sheets 1
Consolidated Statements of Income 3
Consolidated Statements of Retained Earnings 3
Consolidated Statements of Cash Flows 4
Condensed Notes to Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Results of Operations 6
Part II - Other Information
Item 1. Legal Proceedings 8
Item 2. Changes in Securities 8
Item 3. Defaults Upon Senior Securities 8
Item 4. Submission of Matters to a Vote of Security Holders 8
Item 5. Other Information 8
Item 6. Exhibits and Reports on Form 8-K 8
Signatures 9
Exhibit 12
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PART I.
Item 1.
CAROLINA TELEPHONE AND TELEGRAPH COMPANY
CONSOLIDATED BALANCE SHEETS
(in thousands)
June 30, December 31,
1997 1996
- --------------------------------------------------------------------- -- ------------------ --- ------------------
(unaudited)
<S> <C> <C>
Assets
Current assets
Cash $ 3,587 $ 414
Accounts receivable
Customers and other, net of allowance for doubtful accounts
of $3,483 and $3,506 116,695 107,193
Interexchange carriers 25,273 23,174
Affiliated companies 6,275 8,847
Inventories 6,908 9,118
Prepaid expenses and other 2,490 5,011
- --------------------------------------------------------------------- -- ------------------ --- ------------------
Total current assets 161,228 153,757
Property, plant and equipment 2,006,060 1,939,608
Less accumulated depreciation 1,107,764 1,062,982
- --------------------------------------------------------------------- -- ------------------ --- ------------------
898,296 876,626
Investment in affiliate preferred stock 29,043 29,043
Deferred charges and other assets 63,763 58,618
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$ 1,152,330 $ 1,118,044
-- ------------------ --- ------------------
See accompanying Condensed Notes to Consolidated Financial Statements
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PART I.
Item 1.
CAROLINA TELEPHONE AND TELEGRAPH COMPANY
CONSOLIDATED BALANCE SHEETS
(in thousands)
June 30, December 31,
1997 1996
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(unaudited)
Liabilities and shareholder's equity
Current liabilities
<S> <C> <C>
Outstanding checks in excess of cash balances $ 244 $ 2,956
Advances from parent company 149,605 137,002
Current maturities of long-term debt 839 842
Accounts payable
Vendors and other 19,171 17,993
Interexchange carriers 24,595 18,911
Affiliated companies 11,110 18,902
Accrued taxes 13,574 6,132
Advance billings 18,148 16,869
Other 20,046 24,874
- -------------------------------------------------------------------------------------------------------------------
Total current liabilities 257,332 244,481
Long-term debt 198,719 198,631
Deferred credits and other liabilities
Deferred income taxes and investment tax credits 93,918 89,513
Postretirement and other benefit obligations 67,946 62,740
Other 2,420 7,939
- -------------------------------------------------------------------------------------------------------------------
164,284 160,192
Common stock and other shareholder's equity Common stock, par value $20 per
share, authorized - 5,000 shares, issued and outstanding 3,627 shares 72,530 72,530
Capital in excess of par value 75,744 75,744
Retained earnings 383,721 366,466
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531,995 514,740
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$ 1,152,330 $ 1,118,044
---------------------------------------------
See accompanying Condensed Notes to Consolidated Financial Statements
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PART I.
Item 1.
CAROLINA TELEPHONE AND TELEGRAPH COMPANY
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(in thousands)
Three Months Ended Year to Date
June 30, June 30,
---------------------------------- ----------------------------------
1997 1996 1997 1996
- -------------------------------------------- --- ------------- -- ------------- --- ------------- -- -------------
NET OPERATING REVENUES
<S> <C> <C> <C> <C>
Local service $ 97,603 $ 86,019 $ 191,294 $ 167,896
Network access 60,301 58,656 117,484 116,112
Toll service 8,933 14,550 18,920 33,494
Telecommunications equipment 19,237 18,655 33,674 31,762
Other 33,864 32,347 64,704 58,814
- -------------------------------------------- --- ------------- -- ------------- --- ------------- -- -------------
Total net operating revenues 219,938 210,227 426,076 408,078
- -------------------------------------------- --- ------------- -- ------------- --- ------------- -- -------------
OPERATING EXPENSES
Plant operations 52,310 54,370 105,222 106,100
Depreciation and amortization 35,412 34,267 69,969 67,687
Customer operations 38,463 33,652 75,363 65,133
Corporate operations 17,892 17,063 36,061 34,830
Cost of telecommunications equipment 13,715 13,159 23,541 21,869
Other 5,087 4,798 9,936 9,444
- -------------------------------------------- --- ------------- -- ------------- --- ------------- -- -------------
Total operating expenses 162,879 157,309 320,092 305,063
- -------------------------------------------- --- ------------- -- ------------- --- ------------- -- -------------
OPERATING INCOME 57,059 52,918 105,984 103,015
Interest expense (5,486) (5,003) (10,804) (10,293)
Other income, net 3,474 3,521 7,362 7,091
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INCOME BEFORE INCOME TAXES 55,047 51,436 102,542 99,813
Income taxes (20,445) (19,023) (38,324) (37,283)
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NET INCOME $ 34,602 $ 32,413 $ 64,218 $ 62,530
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CONSOLIDATED STATEMENTS OF RETAINED EARNINGS (UNAUDITED)
(in thousands)
Year to Date
June 30,
----------------------------------
1997 1996
- ----------------------------------------------------------------------------------- ------------- -- -------------
RETAINED EARNINGS AT BEGINNING OF PERIOD $ 366,466 $ 342,746
Net Income 64,218 62,530
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430,684 405,276
Dividends declared (46,963) (40,510)
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RETAINED EARNINGS AT END OF PERIOD $ 383,721 $ 364,766
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See accompanying Condensed Notes to Consolidated Financial Statements
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PART I.
Item 1.
CAROLINA TELEPHONE AND TELEGRAPH COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)
Year to Date
June 30,
----------------------------------
1997 1996
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OPERATING ACTIVITIES
<S> <C> <C>
Net income $ 64,218 $ 62,530
Adjustments to reconcile net income to net cash provided by operating
activities
Depreciation and amortization 69,969 67,687
Deferred income taxes and investment tax credits 6,603 2,097
Changes in assets and liabilities:
Accounts receivable, net (9,029) (16,770)
Inventories and other current assets 2,330 (3,675)
Accounts payable and other current liabilities 251 (2,626)
Noncurrent assets and liabilities, net (4,023) (2,196)
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Net cash provided by operating activities 130,319 107,047
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INVESTING ACTIVITIES
Capital expenditures (90,318) (89,037)
Other, net (2,553) (1,314)
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Net cash used by investing activities (92,871) (90,351)
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FINANCING ACTIVITIES
Increase in advances from parent company 12,603 79,289
Payments on long-term debt - (12,636)
Decrease in short-term borrowings - (42,800)
Dividends paid (46,963) (40,510)
Other, net 85 --
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Net cash used by financing activities (34,275) (16,657)
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INCREASE IN CASH 3,173 39
CASH AT BEGINNING OF PERIOD 414 54
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CASH AT END OF PERIOD $ 3,587 $ 93
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SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest (excluding amounts capitalized) $ 10,578 $ 11,090
Cash paid for taxes $ 21,659 $ 37,842
See accompanying Condensed Notes to Consolidated Financial Statements
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<PAGE>
PART I.
Item 1.
CAROLINA TELEPHONE AND TELEGRAPH COMPANY
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
June 30, 1997 and 1996
The information contained in this Form 10-Q has been prepared according to the
rules and regulations of the Securities and Exchange Commission. In management's
opinion, the consolidated interim financial statements reflect all adjustments
(consisting only of normal recurring accruals) necessary to present fairly the
consolidated financial position, results of operations and cash flows for the
periods presented.
Certain information and footnote disclosures normally included in consolidated
financial statements prepared according to generally accepted accounting
principles (GAAP) have been condensed or omitted. These consolidated financial
statements should be read in connection with Carolina Telephone and Telegraph
Company's 1996 annual report on Form 10-K. Operating results for the 1997
year-to-date period are not necessarily indicative of operating results that may
be expected for the year ending December 31, 1997.
1. Basis of Consolidation
The consolidated financial statements include the accounts of Carolina Telephone
and Telegraph Company and its wholly-owned subsidiaries (CT&T). All significant
intercompany transactions have been eliminated. CT&T is a wholly-owned
subsidiary of Sprint Corporation; as a result, earnings per share information is
not required.
The consolidated financial statements are prepared according to GAAP. GAAP
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, the disclosure of contingent assets and
liabilities, as well as the reported amounts of revenues and expenses. Actual
results could differ from those estimates.
Certain prior year amounts have been reclassified to conform to the current
period presentation. These reclassifications had no effect on the results of
operations or shareholder's equity as previously reported.
<PAGE>
PART I.
Item 2.
CAROLINA TELEPHONE AND TELEGRAPH COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
General
Carolina Telephone and Telegraph Company and its wholly-owned subsidiaries
(CT&T) include certain estimates, projections and other forward-looking
statements in their reports, as well as in presentations to analysts and others,
and in other material made available to the public. Future performance cannot be
assured. Actual results may differ materially from those in the forward-looking
statements. Factors that could cause actual results to differ materially from
estimates or projections contained in the forward-looking statements include:
- the effects of vigorous competition in the markets in which CT&T operates;
- the impact of any unusual items resulting from ongoing evaluations of
CT&T's business strategies;
- requirements imposed on CT&T and its competitors by the Federal
Communications Commission (FCC) and North Carolina Utilities Commission
under the Telecommunications Act of 1996(Telecom Act);
- unexpected results of litigation filed against CT&T; and
- the possibility of one or more of the markets in which CT&T competes being
impacted by variations in political, economic or other factors such as
legal and regulatory changes or other external factors over which CT&T has
no control.
Regulatory Developments
In accordance with the Telecom Act, the FCC adopted detailed rules in 1996 to
govern interconnection to incumbent local networks by new market entrants. Some
local exchange carriers (LECs) and state public service commissions (PSCs)
appealed these rules to the U.S. Court of Appeals, which prevented most of the
pricing rules from taking effect pending a full review by the court.
In July 1997, the court struck down the FCC's pricing rules. It ruled that the
Telecom Act left jurisdiction over pricing matters to the PSCs. The court also
struck down certain other FCC rules on jurisdictional or substantive grounds.
The court's decision adds to the uncertainty, delay and complexity surrounding
local competition. The FCC plans to appeal the decision to the U.S. Supreme
Court.
In May 1997, the FCC issued important decisions on the structure and level of
access charges and universal service. These decisions will impact the industry
in several ways, including the following:
- an additional subsidy was created to support telecommunications
services for schools, libraries and rural health care providers.
Funding for this program, which is estimated to cost $2.7 billion per
year, will be assessed against all carriers providing telecommunications
services. However, it is expected that LECs will be able to pass their
portion of these costs on to long distance carriers;
- interstate access rates charged by LECs will decline by an estimated
$1.4 billion per year beginning July 1997;
- certain monthly flat-rate charges paid by some local telephone subscribers
will increase beginning in 1998;
- certain per-minute access charges paid by long distance companies
were converted to flat monthly charges based on pre-subscribed lines;
and
- a basis has been established for replacing implicit access subsidies
with an explicit interstate universal service fund beginning in 1999.
A number of LECs, long distance companies and others have appealed some or all
of the FCC's orders. The effective date of the orders has not been postponed,
but the appeals are expected to take a year or more to conclude. The impact of
these FCC decisions on CT&T is difficult to determine, but is not expected to be
material.
Results of Operations
Year-to-date net operating revenues for 1997 increased 4% compared with the same
period a year ago. The increase was mainly due to increased local service
revenues, partly offset by reduced toll service revenues. The increase in other
revenues reflects the expanded operations of locating underground utility lines
which was due to an increased customer base in existing service areas.
Local service revenues, derived from local exchange services, increased 14% for
the 1997 year-to-date period compared with the same 1996 period. The increase
was mainly due to continued residential and business growth in access lines
served, extended local area calling plans and increased demand for custom
calling features, such as Caller ID, voice dialing and return call. Access lines
served increased 4.7% during the past 12 months. Revised local area calling
plans allow residential customers to choose one of three local service options
and business customers to choose one of two local service options.
Toll service revenues are mainly derived from providing long distance services
within specified geographical areas. These year-to-date 1997 revenues decreased
$15 million from the same period a year ago. The decrease was mainly due to a
reduction in revenues from reselling interexchange long distance services, which
was phased out through early 1997. It also reflects extended local area calling
plans, which caused a corresponding increase in local service revenues.
During the 1997 year-to-date period, total operating expense increased 5%
compared with the same period a year ago, mainly due to increased customer
operations expense. That increase was mainly due to the expanded operations of
locating underground utility lines, increased marketing costs to promote
products and services and an increase in bad debt expense, which is consistent
with a nationwide increase in consumer bad debt. CT&T is implementing a number
of new processes and procedures to improve its collection results. Customer
operations expense also reflects increased business office operations and
developmental expenses incurred for a new marketing operations and customer
billing system in the process of implementation.
<PAGE>
PART II.
Other Information
Item 1. Legal Proceedings
There were no reportable events during the quarter ended June 30,
1997.
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
CT&T's ratios of earnings to fixed charges were 9.99 and 9.27 for the
1997 and 1996 second quarter, respectively, and 9.54 and 8.91 for the
1997 and 1996 year-to-date periods, respectively. These ratios were
computed by dividing fixed charges into the sum of (a) income before
taxes, less capitalized interest, and (b) fixed charges. Fixed charges
consist of interest on all debt (including amortization of debt
issuance expenses) and the interest component 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) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended June
30, 1997.
<PAGE>
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)
By /s/ F. E. Westmeyer
F. E. Westmeyer, Vice President-Finance
(Principal Financial Officer)
By /s/ T. J. Geller
T. J. Geller, Controller
(Principal Accounting Officer)
Date: August 11, 1997
<PAGE>
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EXHIBIT INDEX
- --------------------------------------------------------------------------------
EXHIBIT
NUMBER
(12) Computation of Ratio of Earnings to Fixed Charges
(27) Financial Data Schedule
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EXHIBIT 12
CAROLINA TELEPHONE AND TELEGRAPH COMPANY
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES (UNAUDITED)
(dollars in thousands)
Three Months Ended Year to Date
June 30, June 30,
--- ------------------------------ --- ------------------------------
1997 1996 1997 1996
- -------------------------------------------- --- ------------- -- ------------- --- ------------- -- -------------
Earnings
<S> <C> <C> <C> <C>
Income before income taxes $ 55,047 $ 51,436 $ 102,542 $ 99,813
Capitalized interest (118) (610) (156) (1,049)
- -------------------------------------------- --- ------------- -- ------------- --- ------------- -- -------------
Subtotal 54,929 50,826 102,386 98,764
- -------------------------------------------- --- ------------- -- ------------- --- ------------- -- -------------
Fixed charges
Interest charges 5,604 5,613 10,960 11,342
Interest factor of operating rents 509 536 1,034 1,144
- -------------------------------------------- --- ------------- -- ------------- --- ------------- -- -------------
Total fixed charges 6,113 6,149 11,994 12,486
- -------------------------------------------- --- ------------- -- ------------- --- ------------- -- -------------
Earnings, as adjusted $ 61,042 $ 56,975 $ 114,380 $ 111,250
--- ------------- -- ------------- --- ------------- -- -------------
Ratio of earnings to fixed charges 9.99 9.27 9.54 8.91
--- ------------- -- ------------- --- ------------- -- -------------
Note: These ratios were computed by dividing fixed charges into the sum of
(a) income before taxes, less capitalized interest, and (b) fixed
charges. Fixed charges consist of interest on all debt (including
amortization of debt issuance expenses) and the interest component of
operating rents.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> Dec-31-1997
<PERIOD-END> Jun-30-1997
<CASH> 3,587
<SECURITIES> 0
<RECEIVABLES> 151,726
<ALLOWANCES> 3,483
<INVENTORY> 6,908
<CURRENT-ASSETS> 161,228
<PP&E> 2,006,060
<DEPRECIATION> 1,107,764
<TOTAL-ASSETS> 1,152,330
<CURRENT-LIABILITIES> 257,332
<BONDS> 198,719
0
0
<COMMON> 72,530
<OTHER-SE> 459,465
<TOTAL-LIABILITY-AND-EQUITY> 1,152,330
<SALES> 0
<TOTAL-REVENUES> 426,076
<CGS> 0
<TOTAL-COSTS> 250,554
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 10,804
<INCOME-PRETAX> 102,542
<INCOME-TAX> 38,324
<INCOME-CONTINUING> 64,218
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 64,218
<EPS-PRIMARY> 0.00
<EPS-DILUTED> 0.00
</TABLE>
