UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
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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: 1-6 469
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CAROLINA TELEPHONE AND TELEGRAPH COMPANY
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(Exact name of registrant as specified in its charter)
North Carolina 56-0931189
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
14111 Capital Boulevard, Wake Forest, 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)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
This registrant meets the conditions set forth in General Instruction I(1)(a)
and (b) of Form 10-K 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
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
There is no voting stock held by non-affiliates.
There are 3,626,510 shares of common stock, par value $20, outstanding at
December 31, 1996 and as of the date of filing of this report.
Documents incorporated by reference: None
<PAGE>
CAROLINA TELEPHONE AND TELEGRAPH COMPANY
Securities and Exchange Commission
Form 10-K, Part I
Item 1. Business
Carolina Telephone and Telegraph Company (the Company), a wholly-owned
subsidiary of Sprint Corporation (Sprint), was incorporated under the laws of
the State of North Carolina in 1968, and in 1969 acquired all of the public
utility assets of the predecessor company of the same name pursuant to a plan
of merger. The Company's principal offices are located at 14111 Capital
Boulevard, Wake Forest, North Carolina 27587-5900 and its telephone number is
(919) 554-7900. The term "Company" herein refers to the present Company and,
as the context requires, its predecessor of the same name which was
incorporated in the State of North Carolina in 1900, as well as its
wholly-owned subsidiaries, Carolina Telephone Long Distance, Inc., SC One
Company and Joint Underground Locating Services, Inc.
The Company is engaged in the business of furnishing communications
services, mainly local and long distance services and network access, and
selling telecommunications equipment. The Company serves 144 exchange areas
in all or part of 50 counties generally in the eastern portion of North
Carolina. As of December 31, 1996, the Company had an investment in property,
plant and equipment of $876,626,000, net of accumulated depreciation.
Operating revenues for the year 1996 amounted to $837,657,000.
The principal industries in the Company's service area are agriculture,
textiles, chemicals and tourism. Military installations, including Fort
Bragg, Camp Lejeune, Cherry Point Marine Corps Air Station, the U.S. Coast
Guard Base at Elizabeth City and Pope Air Force Base, contribute significantly
to the economy of the area.
Digital switching equipment and fiber optic cable represent a substantial
portion of the Company's expansion of long distance facilities. At December
31, 1996, the Company served 1,043,356 access lines, distributed among 144
exchange areas as follows: Fayetteville, 14.6 percent; Greenville, 5.5
percent; Rocky Mount, 4.5 percent; Jacksonville, 4.2 percent; Wilson, 3.1
percent; New Bern, 3.0 percent; and all other areas less than 3.0 percent
each.
In addition to furnishing local service, the Company's central offices
and toll lines are connected with other telephone companies and with the
nationwide toll networks of interexchange carriers. Toll calls may thus be
made from any telephone in the Company's service area to anywhere in the
United States and most other countries. Other telecommunications services,
for the most part furnished in conjunction with other telephone companies,
include facilities for private line service, data transmission, radio and
television program transmission, mobile radio telephone, cellular and wide
area telecommunications service.
Revenues from communications services, principally telephone service,
constitute about 77.2 percent of the total 1996 operating revenues of the
Company. A significant portion of the Company's network access revenues are
derived from access charge billings to AT&T Corporation (AT&T). However, the
Company does not believe its revenues are dependent upon AT&T, as customers'
demand for interLATA long distance telephone service is not tied to any one
long distance carrier. As the market share of AT&T's long distance
<PAGE>
Carolina Telephone & Telegraph Company
Form 10-K Part I
Item 1. Business (continued)
competitors increases, the percent of revenues derived from network access
services provided to AT&T decreases. Other revenues are derived in large part
from the sale of telephone directory listings, the sale of telecommunications
equipment, the lease of network facilities, providing operator services and
processing customer toll billings for interexchange carriers, primarily AT&T.
The following tables show certain information regarding access lines in
service and toll messages handled for the periods indicated.
Access Lines
Change
Number at End of Period During Period
Period Residence Business Total Number % Change
- ------ --------- -------- ----- ------ --------
1996 792,173 251,183 1,043,356 51,310 5.2
1995 763,923 228,123 992,046 44,081 4.7
1994 738,815 209,150 947,965 42,431 4.7
1993 710,977 194,557 905,534 42,693 4.9
1992 681,167 181,674 862,841 36,343 4.4
Toll Messages
Total For Year Average Messages Per Day
Period Number % Change Number % Change
- ------ ------ -------- ------ --------
1996 560,193,027 4.5 1,534,775 4.5
1995 536,211,752 11.7 1,469,073 11.7
1994 480,122,986 5.9 1,315,405 5.9
1993 453,494,308 6.9 1,242,450 7.2
1992 424,096,621 8.8 1,158,734 8.5
On December 31, 1996, the Company had 3,739 employees, of which 2,026 or
54.2 percent were represented by the Communications Workers of America, and
118 or 3.2 percent were represented by the International Brotherhood of
Electrical Workers for collective bargaining purposes. The Company had no
material work stoppages caused by labor controversies.
The Company's environmental compliance and remediation expenditures are
primarily related to the operation of standby power generators. The
expenditures arise in connection with permits, standards compliance or
occasional remediation associated with generators, batteries or fuel storage.
The Company's expenditures relating to environmental compliance and
remediation have had no significant effect upon capital expenditures or
earnings of the Company, and future effects are not expected to be material.
Carolina Telephone Long Distance, Inc. (CTLD) is a North Carolina
corporation formed in 1987. In 1987, the North Carolina Utilities Commission
granted CTLD a certificate for the provision of services. In February 1997,
CTLD filed with the North Carolina Utilities Commission its notice of
intention to cease providing all but nonswitched, private line services
effective April 30, 1997.
<PAGE>
Carolina Telephone & Telegraph Company
Form 10-K Part I
Item 1. Business (continued)
The Company is subject to the jurisdiction of the Federal Communications
Commission (FCC) and the North Carolina Utilities Commission (Commission).
Effective January 1, 1991, the FCC adopted a price cap regulatory format
for the Regional Bell Operating Companies and the GTE local exchange
companies. Other local exchange companies (LECs) could voluntarily become
subject to price cap regulation. Under price caps, prices for access service
must be adjusted annually to reflect industry average productivity gains (as
specified by the FCC), inflation and certain allowed cost changes. The
Company elected to be subject to price cap regulation. During 1995, the FCC
adopted modifications to the price cap plan to reset productivity elections,
change certain rate adjustment methods, address new service offerings and
generally reduce regulatory requirements. Under these changes, the Company
elected a productivity factor that allows it to avoid sharing of interstate
access earnings. On December 24, 1996, the FCC issued a Notice of Proposed
Rule Making relative to Access Charge Reform. The FCC is seeking to make the
access charge system more economically efficient and more consistent with the
development of local competition in the telecommunications industry.
Effective July 1, 1995, the North Carolina General Assembly enacted
legislation that enabled incumbent local exchange telephone companies such as
the Company to elect to have its intrastate rates, terms and conditions for
services determined pursuant to a price cap form of regulation. The Company
filed a petition in October 1995 to elect price regulation, and the Commission
approved a price regulation plan effective June 24, 1996. The approved plan
required $30 million in rate reductions with $15 million scheduled on the
effective date of the plan and the remaining $15 million to occur in $5
million increments on each of the next three anniversary dates of the plan.
Rate reductions are targeted for touchtone, access, intraLATA toll and complex
business services. The price regulation will allow the Company to adjust
prices for basic, interconnection and non-basic services, using an inflation-
based formula. As a consumer safeguard, the Company will cap residential
rates at its June 24, 1996 level for the initial three years of the plan.
The enactment of the federal Telecommunications Act of 1996 (the Act)
will enable direct competition in the Company's local exchange service market.
The potential for immediate competition is increasing with eleven competitive
carriers certificated (as of January 16, 1997) to provide services statewide.
An important issue to be addressed by the Commission in 1997 will be the
continuance of universally available telephone service at reasonable rates.
The Commission will defer action until the FCC issues its final order on
May 8, 1997 regarding universal service issues set forth in the Act. The
creation of an explicit universal service fund will enable the Company to
more closely align its rates for competitive services (e.g., access services,
intraLATA toll services and complex business services) with the cost to
provide these services.
The extent and ultimate impact of competition for LECs will continue to
depend, to a considerable degree, on FCC and Commission actions, court
decisions and possible federal or state legislation. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" for
a discussion of the Act.
<PAGE>
Carolina Telephone & Telegraph Company
Form 10-K Parts I/II
Item 2. Properties
The properties of the Company consist principally of land, structures,
facilities and equipment. Central office equipment represents approximately
41.3 percent of the Company's investment in telephone plant in service; land
and buildings (occupied principally by central office equipment) represent
7.3 percent; telephone instruments and related wiring and equipment including
private branch exchanges (PBX) (substantially all of which are located on the
premises of subscribers) represent 1.6 percent; connecting lines not on
subscribers' premises (the majority of which are on or under public highways
and streets and the remainder on or under private property) represent 43.9
percent; and other telephone plant represents 5.9 percent. Of the 144
exchanges, 140 exchanges have central offices located on land owned by the
Company and served 84.5 percent of the Company's access lines; 3 exchanges
have central offices located in leased facilities and served 0.9 percent of
the Company's access lines; and 1 exchange (Fayetteville) has central offices,
some of which are located on land owned by the Company and some of which are
located in leased facilities, and served an aggregate of 14.6 percent of the
Company's access lines.
Standard practices prevailing in the telephone industry are followed by
the Company in the construction and maintenance of its plant and facilities;
the Company considers that its plant and facilities are, as a whole, in sound
physical and operating condition.
The following table shows gross additions to and retirements of
properties of the Company during the five years ended December 31
(in thousands):
Gross
Additions Retirements
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1996 $158,586 $43,833
1995 146,146 49,211
1994 146,110 39,761
1993 146,543 51,020
1992 143,057 89,179
Item 3. Legal Proceedings
No material legal proceedings are pending to which the Company or its
subsidiaries are a party or of which any of their property is the subject.
Item 4. Submission of Matters to a Vote of Security Holders
Omitted under the provisions of General Instruction I.
Item 5. Market for Registrant's Common Stock and Related Stockholder
Matters
The Registrant is a wholly-owned subsidiary of Sprint and consequently
its common stock is not traded.
<PAGE>
Carolina Telephone & Telegraph Company
Form 10-K Part II
Item 6. Selected Financial Data (in thousands)
December 31,
1996 1995 1994 1993 1992
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Operating revenues $ 837,657 $ 769,464 $ 717,454 $ 638,541 $ 590,440
Net income (1)(2) 114,093 57,508 94,944 47,168 72,800
Total assets 1,118,044 1,052,378 1,138,522 1,078,929 1,025,295
Long term debt (excluding
current maturities) 198,631 248,309 260,736 269,087 240,535
(1) In 1995, the Company initiated a restructuring in an effort to stream-
line certain processes and reduce costs in an increasingly competitive
marketplace. As a result, the Company recorded an $8,079,000 nonrecuring
charge in 1995, which reduced net income by $4,844,000.
(2) Effective December 31, 1995, the Company determined that it no longer
met the criteria necessary for the continued application of the provisions of
Statement of Financial Accounting Standards (SFAS) No. 71, "Accounting for
the Effects of Certain Types of Regulation." As a result of the decision to
discontinue the application of SFAS No. 71, the Company recorded a noncash
extraordinary charge of $42,424,000, net of income tax benefits of
$51,523,000.
Earnings and dividends per share information have been omitted because
the Company is a wholly-owned subsidiary of Sprint.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The Company's financial well-being plays a vital role in its efforts to
provide efficient, responsive, state-of-the art communication services to the
rapidly growing North Carolina market amid the uncertainties created by
deregulation. In order to meet the challenges of this dynamic environment,
the Company continues to seek ways to increase organizational efficiency
through process improvements and careful control of construction expenditures
and automation and consolidation of functions. Concurrently, efforts have
been undertaken to aggressively implement new technologies, including enhanced
digital switching, fiber optics and pair gain devices that offer expanded
services at reduced costs.
The Company includes certain estimates, projections, and other forward-
looking statements in its reports, presentations and other material
disseminated to the public. There can be no assurance of future performance
and actual results may differ materially from those in the forward-looking
statements. Factors that could cause actual results to differ materially
<PAGE>
Carolina Telephone & Telegraph Company
Form 10-K Part II
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
from estimates or projections contained in the forward-looking statements
include:
* the effects of vigorous competition in the markets in which the Company
operates;
* the impacts of any unusual items resulting from ongoing evaluations of
the Company's business strategies;
* requirements imposed on the Company and its competitors by the Federal
Communications Commission and North Carolina Utilities Commission under
the Telecommunications Act of 1996;
* unexpected results of litigation filed against the Company; and
* the possibility of one or more of the markets in which the Company
competes being affected by variations in political, economic or other
factors such as monetary policy, legal and regulatory changes or other
external factors over which the Company has no control.
Telecommunications Law
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The Telecommunications Act of 1996 (the Act), which was signed into law
in February 1996, promotes competition in all aspects of telecommunications.
In particular, the Act removes barriers to competition that will enable local
and long distance companies and cable TV companies to enter each other's
markets. The FCC is in the process of adopting several new rules, as required
by the Act, to implement telecommunications competition.
The Act eliminates regulatory barriers to entry into local telephone
markets and imposes several obligations upon incumbent LECs. They must allow
local resale without unreasonable restrictions, provide number portability
and dialing parity, afford access to rights-of-way, establish reciprocal
compensation arrangements, negotiate interconnection agreements, provide
nondiscriminatory access to unbundled network elements and allow collocation
of interconnection equipment by competitors.
The impact of the Act on the Company is unknown because a number of
important implementation issues (such as the nature and extent of continued
subsidies for local rates) still need to be decided by state or federal
regulators. However, the Act offers opportunities as well as risks. The new
competitive environment should lead to a reduction in local access fees, the
largest single cost in providing long distance service today. The risk
aspect of local competition is that the market share of the Company is likely
to decline.
Results of Operations
- ---------------------
Operating revenues are classified as local service, network access, long
distance, telecommunications equipment sales and other. Local service
revenues come from providing local telephone exchange services and leasing
equipment. Network access revenues are derived from billing other carriers
and telephone customers for their use of the local network to complete long
distance calls in those instances where the long distance service is not
provided entirely by the Company. Long distance revenues are derived
<PAGE>
Carolina Telephone & Telegraph Company
Form 10-K Part II
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Results of Operations (continued)
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principally from providing long distance services within designated areas.
Telecommunications equipment revenues relate to equipment sales. Other
revenues primarily relate to directory advertising, billing and collection
services for interexchange long distance carriers, operator services and
network facilities leases.
Operating revenues increased by $68,193,000 or 8.9 percent during the
year ended December 31, 1996 as compared to 1995, reflecting increases in
local service, network access service, telecommunications equipment sales and
other revenues.
Local service revenues increased $48,990,000 or 16.2 percent during the
year ended December 31, 1996 as compared to 1995. Basic area service revenues
contributed $35,425,000 to this increase, primarily attributable to a 5.2
percent growth in access lines during 1996 and to the implementation of
Expanded Local Calling Service (ELCS). ELCS, which includes exchanges within
an approximately 40-mile radius of a central office, allows residence
customers to choose one of three local service options and business customers
to choose one of two local service options that best fits their personal
calling needs. For the same period, revenue from custom calling features
increased $13,102,000 as a result of access line gains, marketing promotions
and the introduction of the pay-per-use option. Also contributing to the
increased local service revenues were higher maintenance revenues related
principally to inside wiring and key and PBX systems. 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 revenues increased $16,673,000 or 7.6 percent during the
year ended December 31, 1996 as compared to 1995. The increase was primarily
due to a 9.9 percent growth in interstate access minutes, an 8.8 percent
growth in intrastate access minutes and a final resolution of contingent
interstate revenue liabilities associated with prior years under Price Cap I.
Long distance revenues decreased $34,354,000 or 36.3 percent during the
year ended December 31, 1996 as compared to 1995. Carolina Telephone Long
Distance, Inc. experienced a 26.5 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>
Carolina Telephone & Telegraph Company
Form 10-K Part II
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Results of Operations (continued)
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Telecommunications equipment revenues increased $12,640,000 or 23.8
percent during the year ended December 31, 1996 as compared to 1995. The
equipment sales revenue related principally to telephone instruments, PBX,
data terminal/communications equipment, structured wiring plans and key
systems.
Other revenues increased $24,244,000 or 24.1 percent during the year
ended December 31, 1996 as compared to 1995. The increase primarily
represents increases in general support asset rent revenue, customer late
payment revenue and revenue from North Carolina Utility Services (NCUS) and
Joint Underground Locating Services, Inc. (JULS). Regulatory approval was
given to the Company to charge customers for late payments in 1996. In
September 1996, Sprint contributed JULS to the Company. JULS was previously
owned by The United Telephone Company of Pennsylvania, an affiliate of the
Company. JULS operates a nonregulated line of business specializing in
locating underground utility lines serving the following 13 states:
Indiana, Minnesota, Massachusetts, Missouri, Nebraska, New Hampshire, New
Jersey, New York, Ohio, Oklahoma, Pennsylvania, Texas and Wyoming. JULS and
NCUS, another nonregulated line of business specializing in locating
underground utility lines, contributed $15,748,000 to the increase in other
revenues in 1996. The increase in JULS and NCUS revenues reflects an
expansion of the service and an increase in the customer base in existing
service areas as well as revenues attributable to administering the placement
of buried service wires.
Plant expense increased $11,940,000 or 5.7 percent during the year ended
December 31, 1996 as compared to 1995. The increase is primarily due to
repair expenses incurred from ice storms and Hurricanes Bertha and Fran. Also
contributing to the increase are expenses for a new automated outside plant
mapping and facilities management system.
Customer operations expense increased $26,247,000 or 21.6 percent during
the year ended December 31, 1996 as compared to 1995. JULS and NCUS expenses
contributed $11,295,000 to this increase. JULS and NCUS expenses increased
due to the expansion of its customer base as well as expenses attributable to
administering the placement of buried service wires. Customer operations-
marketing expense increased $4,721,000 primarily due to a more aggressive
sales strategy as the Company continues to intensify its efforts to achieve
an increased market share and gain knowledge of its customer expectations to
differentiate the Company from competition. Business office operations
expense increased $4,556,000 primarily due to increased resources utilized to
meet customer demands. The remainder of the increase is due to uncollectible
accounts and other individually insignificant expenses. An increase in both
revenues and the number of accounts being written off due to a more aggressive
collection strategy contributed to the increase in uncollectible accounts.
Cost of telecommunications equipment expenses increased $6,747,000 or
17.8 percent during the year ended December 31, 1996 as compared to 1995.
This increase is primarily due to an increase in equipment sales.
<PAGE>
Carolina Telephone & Telegraph Company
Form 10-K Part II
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Results of Operations (continued)
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In 1995, the Company initiated a restructuring in an effort to streamline
certain processes and reduce costs in an increasingly competitive marketplace.
These actions resulted in the planned elimination of approximately 150
positions. As a result, the Company recorded an $8,079,000 nonrecurring
charge in 1995. The accrued liability related to this charge specifically
relates to the benefits that affected employees will receive upon termination.
Through 1996, approximately 70 positions have been eliminated resulting in
termination benefit payments of $2,521,000. Substantially all of the
remaining positions are expected to be eliminated during 1997, with the
related costs expected to be paid during 1997 and 1998.
Non-operating Items
- -------------------
Other Income
Other income increased $6,275,000 or 72.9 percent during the year ended
December 31, 1996 as compared to 1995. In 1995, the Company transferred its
investment in Rural Service Area cellular partnerships to its affiliate,
Centel Corporation (Centel), in exchange for preferred stock issued by Centel.
The increase in other income in 1996 was primarily due to dividends received
on the Centel preferred stock.
Extraordinary Items
In 1996, the Company incurred an extraordinary charge related to the
early extinguishment of debt of $4,085,000, net of the related income tax
benefit.
At December 31, 1995, the Company adopted accounting principles for a
competitive marketplace and discontinued applying SFAS No. 71 (see Note 7 of
"Notes to Consolidated Financial Statements"). SFAS No. 71 requires
accounting recognition of regulators' rate actions where appropriate. The
Company determined that it no longer met the criteria for applying SFAS No. 71
due to changes in the regulatory framework and the evolving competitive
environment. As a result, the Company recorded an after-tax, noncash
extraordinary charge of $42,424,000.
Accounting Changes
Effective January 1, 1994, the Company changed its method of accounting
for postemployment benefits by adopting SFAS No. 112. See Note 2 of "Notes
to Consolidated Financial Statements" for additional information about this
accounting change which did not significantly impact the Company's financial
statements.
Inflation
- ---------
The effects of inflation on the operations of the Company were not
significant during 1996, 1995 or 1994.
<PAGE>
Carolina Telephone & Telegraph Company
Form 10-K Part II
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Financial Condition
- -------------------
The Company's assets increased $65,666,000 to $1.12 billion as of
December 31, 1996 compared to December 31, 1995. Customers and other
accounts receivable increased $26,629,000 as a result of increased revenues,
extended periods for deferred payments and some slowing in rate of customer
payments. Property, plant and equipment, net of accumulated depreciation,
increased $27,524,000 as the Company must continually replace and construct
new facilities. Short-term borrowings increased $94,130,000, primarily due
to redemption of debentures prior to scheduled debt maturities. Currently,
all short-term borrowing transactions are made with Sprint. Long-term debt
(including current maturities of long-term debt) as of December 31, 1996
decreased $61,508,000 compared to December 31, 1995 primarily due to
redemption of debentures prior to scheduled debt maturities. Postretirement
and other benefit obligations increased $10,916,000 as of December 31, 1996
compared to December 31, 1995, primarily due to the current year's
postretirement benefits costs. The Company's total capitalization at
December 31, 1996 totaled $851,215,000, consisting of long-term debt
(including current maturities), short-term borrowings, and common stock and
other stockholder's equity. Short-term borrowings and long-term debt
comprised 39.5 percent of total capitalization at December 31, 1996 compared
to 38.4 percent at December 31, 1995.
Liquidity and Capital Resources
- -------------------------------
Cash flows from operating activities are the Company's primary source of
liquidity. Net cash provided by operating activities decreased $17,261,000
during the year ended December 31, 1996. The decrease in net cash provided
by operating activities was primarily attributable to increases in accounts
receivable, inventories and other current assets, offset by improved operating
results.
Net cash used by investing activities increased $11,056,000 during the
year ended December 31, 1996. In order to meet customer demands, the Company
must continually replace and construct new facilities. The Company's planned
construction expenditures for 1997 are $157,635,000 which includes
expenditures of $73,052,000 for central office equipment, $43,050,000 for
cable facilities, $11,618,000 for general support assets and $29,915,000 for
other expenditures. The Company anticipates that the funds for these
expenditures will be supplied primarily by operating activities.
The primary source of financing for the Company has been long-term debt.
In addition, the Company receives cash advances from Sprint. Net cash used
by financing activities decreased $28,639,000 during the year ended December
31, 1996 primarily due to an increase in advances from Sprint, offset by
dividend payments and the retirement of long-term debt.
As of December 31, 1996, the Company had a total of $31,000,000 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
<PAGE>
Carolina Telephone & Telegraph Company
Form 10-K Part II
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Liquidity and Capital Resources (continued)
- -------------------------------------------
withdrawn by the banks if there is a material adverse change in the financial
condition of Sprint or the Company. As of December 31, 1996, no amounts were
borrowed against this credit facility. The Company's short-term financing
was provided by Sprint in 1996. The weighted average interest rates on
short-term borrowings in 1996, 1995 and 1994 were 5.5 percent, 5.9 percent
and 4.6 percent, respectively.
The Company is also authorized to issue and sell an additional
$75,000,000 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.
Carolina Telephone Long Distance, Inc. (CTLD) is a North Carolina
corporation formed in 1987. In 1987, the North Carolina Utilities Commission
(Commission) granted CTLD a certificate for the provision of services. In
February 1997, CTLD filed with the Commission its notice of intention to
cease providing all but nonswitched, private line services effective April 30,
1997.
<PAGE>
Carolina Telephone & Telegraph Company
Form 10-K Part II
Item 8. Financial Statements and Supplementary Data
CAROLINA TELEPHONE AND TELEGRAPH COMPANY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page Reference
--------------
Report of Independent Auditors Page 14
Consolidated Balance Sheets as of
December 31, 1996 and 1995 Pages 15 -16
Consolidated Statements of Income
for each of the three years
ended December 31, 1996 Page 17
Consolidated Statements of Changes
in Stockholder's Equity for each
of the three years ended
December 31, 1996 Page 18
Consolidated Statements of Cash Flows
for each of the three years ended
December 31, 1996 Page 19
Notes to Consolidated Financial Statements Pages 20 - 30
<PAGE>
Carolina Telephone & Telegraph Company
Form 10-K Part II
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Carolina Telephone and Telegraph Company
We have audited the accompanying consolidated balance sheets of Carolina
Telephone and Telegraph Company (the Company), a wholly-owned subsidiary of
Sprint Corporation, as of December 31, 1996 and 1995, and the related
consolidated statements of income, common stock and other stockholder's
equity, and cash flows for each of the three years in the period ended
December 31, 1996. Our audits also included the financial statement schedule
listed in the Index at Item 14(a). These financial statements and the
schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and the
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of the Company at December 31, 1996 and 1995, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1996 in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule,
when considered in relation to the basic financial statements taken as a
whole, presents fairly in all material respects the information set forth
therein.
As discussed in Note 7 to the consolidated financial statements, the
Company discontinued accounting for its operations in accordance with
Statement of Financial Accounting Standards No. 71, "Accounting for the
Effects of Certain Types of Regulation," in 1995.
ERNST & YOUNG LLP
Kansas City, Missouri
January 22, 1997
<PAGE>
CAROLINA TELEPHONE AND TELEGRAPH COMPANY
CONSOLIDATED BALANCE SHEETS
December 31, 1996 and 1995
(In thousands)
1996 1995
Assets ---- ----
- ------
Current assets
Cash $ 414 $ 54
Receivables, net of allowance for
doubtful accounts of $3,506 ($2,348
in 1995)
Customers and other 107,193 81,710
Interexchange carriers 23,174 25,955
Affiliated companies 8,847 4,920
Inventories 9,118 6,884
Deferred income taxes 3,988 23
Prepaid expenses and other 1,023 1,578
--------- ---------
153,757 121,124
Property, plant and equipment 1,939,608 1,818,491
Less accumulated depreciation 1,062,982 969,389
---------- ----------
876,626 849,102
Deferred charges and other assets
Investment in affiliated company 29,043 29,043
Prepaid pension accrual 51,991 43,725
Other 6,627 9,384
---------- ----------
87,661 82,152
---------- ----------
$1,118,044 $1,052,378
========== ==========
<PAGE>
CAROLINA TELEPHONE AND TELEGRAPH COMPANY
CONSOLIDATED BALANCE SHEETS
December 31, 1996 and 1995
(In thousands)
1996 1995
Liabilities and Stockholder's Equity ---- ----
Current liabilities
Outstanding checks in excess of cash balances $ 2,956 $ 7,443
Short-term borrowings
Commercial paper - 42,800
Advances from parent 137,002 72
Current maturities of long-term debt 842 12,672
Accounts payable
Vendors and other 17,993 14,532
Interexchange carriers 18,911 20,389
Affiliated companies 18,902 15,883
Accrued taxes 6,132 14,635
Advance billings and customer deposits 16,869 18,178
Accrued vacation pay 9,021 8,916
Accrued payroll 6,226 5,692
Other 9,627 12,025
---------- ----------
244,481 173,237
Long-term debt 198,631 248,309
Deferred credits and other liabilities
Deferred income taxes 89,513 77,841
Postretirement and other benefit obligations 62,740 51,824
Other 7,939 13,900
---------- ----------
160,192 143,565
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 366,466 342,746
---------- ----------
514,740 487,267
---------- ----------
$1,118,044 $1,052,378
See accompanying notes to consolidated financial statements.
<PAGE>
CAROLINA TELEPHONE AND TELEGRAPH COMPANY
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, 1996, 1995 and 1994
(In thousands)
1996 1995 1994
---- ---- ----
Operating Revenues
Local service $351,218 $302,228 $276,532
Network access service 235,642 218,969 204,928
Long distance service 60,192 94,546 108,688
Telecommunications equipment 65,782 53,142 44,431
Other 124,823 100,579 82,875
-------- -------- --------
837,657 769,464 717,454
Operating Expenses
Plant expense 223,189 211,249 200,608
Depreciation 135,205 132,146 133,764
Customer operations 147,947 121,700 97,094
Corporate operations 71,863 68,514 65,815
Cost of telecommunications equipment 44,595 37,848 31,906
Restructuring costs - 8,079 -
Other 19,979 17,675 15,365
-------- -------- -------
642,778 597,211 544,552
-------- -------- --------
Operating Income 194,879 172,253 172,902
Interest expense (21,262) (22,413) (22,105)
Other income 14,668 8,602 323
-------- -------- --------
Income before income taxes and
extraordinary items 188,285 158,442 151,120
Income taxes (70,107) (58,510) (56,176)
-------- -------- --------
Income before extraordinary items 118,178 99,932 94,944
Extraordinary items
Discontinuation of regulatory
accounting principles, net - (42,424) -
Early extinguishment of debt, net (4,085) - -
-------- -------- --------
Net income $114,093 $ 57,508 $ 94,944
======== ======== ========
See accompanying notes to consolidated financial statements.
<PAGE>
CAROLINA TELEPHONE AND TELEGRAPH COMPANY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
Years ended December 31, 1996, 1995 and 1994
(In thousands)
Capital in
Common Excess of Retained
Stock Par Value Earnings Total
------ ---------- -------- -----
Balance at January 1, 1994 $72,530 $71,991 $305,765 $450,286
Net income - - 94,944 94,944
Cash dividends on common stock - - (31,188) (31,188)
------- ------- -------- --------
Balance at December 31, 1994 72,530 71,991 369,521 514,042
Net income - - 57,508 57,508
Cash dividends on common stock - - (84,283) (84,283)
------- ------- -------- --------
Balance at December 31, 1995 72,530 71,991 342,746 487,267
Net income - - 114,093 114,093
Cash dividends on common stock - - (90,373) (90,373)
Contribution of JULS - 3,753 - 3,753
------- ------- -------- --------
Balance at December 31, 1996 $72,530 $75,744 $366,466 $514,740
See accompanying notes to consolidated financial statements.
<PAGE>
CAROLINA TELEPHONE AND TELEGRAPH COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1996, 1995 and 1994
(In Thousands)
1996 1995 1994
Operating Activities ---- ---- ----
Net income $114,093 $57,508 $94,944
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation 135,205 132,146 133,764
Deferred income taxes and
investment tax credits 9,005 (8,738) (4,936)
Extraordinary losses, net 4,085 42,424 -
Changes in operating assets and
liabilities:
Receivables, net (26,629) 1,471 (26,029)
Inventories and other current
assets (1,679) 8,101 (5,886)
Accounts payable, accrued
expenses and other current
liabilities (11,056) (11,608) (7,599)
Noncurrent assets and
liabilities, net (4,088) 14,350 9,607
Other, net 1,904 2,447 (69)
-------- -------- --------
Net cash provided by operating activities 220,840 238,101 193,796
Investing Activities
Capital expenditures (158,586) (146,146) (146,110)
Other, net (4,143) (5,527) (11,238)
-------- -------- --------
Net cash used by investing activities (162,729) (151,673) (157,348)
Financing Activities
Retirements of long-term debt (61,508) (8,569) (574)
Net increase (decrease) in
short-term borrowings (42,800) 9,200 (7,500)
Net increase (decrease) in advances
from parent company 136,930 (2,738) 2,810
Dividends paid (90,373) (84,283) (31,188)
-------- -------- --------
Net cash used by financing activities (57,751) (86,390) (36,452)
-------- -------- --------
Increase (Decrease) in Cash 360 38 (4)
Cash at Beginning of Year 54 16 20
-------- -------- --------
Cash at End of Year $ 414 $ 54 $ 16
======== ======== ========
Supplemental Cash Flow Information
Cash paid for interest, net of
amounts capitalized $ 22,046 $ 22,994 $ 22,504
Cash paid for income taxes 66,498 70,714 57,189
Noncash Activities
Exchange of investment in affiliated
partnership for investment in
affiliated preferred stock $ - $ 29,043 $ -
See accompanying notes to consolidated financial statements.
<PAGE>
Carolina Telephone & Telegraph Company
Form 10-K Part II
CAROLINA TELEPHONE AND TELEGRAPH COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Consolidation and Presentation
The consolidated financial statements include the accounts of Carolina
Telephone and Telegraph Company and its wholly-owned subsidiaries, Carolina
Telephone Long Distance, Inc., SC One Company and Joint Underground Locating
Services, Inc. (JULS). All significant intercompany transactions have been
eliminated. The Company is a wholly-owned subsidiary of Sprint Corporation
(Sprint); accordingly, earnings per share information has been omitted.
The consolidated financial statements are prepared in conformity with
generally accepted accounting principles (GAAP). GAAP requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities. Those estimates and assumptions also affect the 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 prior years have been
reclassified to conform to the current year presentation in the accompanying
consolidated financial statements. These reclassifications had no effect on
the results of operations or stockholder's equity as previously reported.
The Company adopted accounting principles for a competitive marketplace
and discontinued accounting 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," effective December 31, 1995 (see
Note 7).
Operations
The Company provides local exchange services, access by telephone
customers and other carriers to local exchange facilities, sales of
telecommunications equipment and long distance services in North Carolina.
In September 1996, Sprint contributed JULS to the Company. JULS was
previously owned by The United Telephone Company of Pennsylvania, an affiliate
of the Company. Although the contribution of JULS to the Company results in
a change in reporting entity, prior years' financial statements have not been
restated due to the insignificance of its impact to the financial position
and operations of the Company. JULS operates a nonregulated line of business
specializing in locating underground utility lines serving the following 13
states: Indiana, Minnesota, Massachusetts, Missouri, Nebraska, New Hampshire,
New Jersey, New York, Ohio, Oklahoma, Pennsylvania, Texas and Wyoming.
<PAGE>
Carolina Telephone & Telegraph Company
Form 10-K Part II
CAROLINA TELEPHONE AND TELEGRAPH COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Revenue Recognition
Service revenues are recognized as communications services are rendered.
Sales of telecommunications equipment are recognized upon delivery of
products to customers.
Cash
As part of its cash management program, the Company uses controlled
disbursement banking arrangements. Outstanding checks in excess of cash
balances are reflected as a current liability on the consolidated balance
sheets. The Company had sufficient funds available to fund these outstanding
checks when they were presented for payment.
Inventories
Inventories consist of materials and supplies stated at average cost and
equipment held for resale stated at the lower of average cost or market.
Property, Plant and Equipment
Property, plant and equipment is recorded at cost. Generally, ordinary
asset retirements and disposals are charged against accumulated depreciation
with no gain or loss recognized. Repairs and maintenance costs are expensed
as incurred.
Depreciation
The cost of property, plant and equipment is generally depreciated on a
straight-line basis over estimated economic useful lives. Prior to the
discontinued use of SFAS No. 71 as of December 31, 1995, the cost of property,
plant and equipment had been generally depreciated on a straight-line basis
over the lives prescribed by regulatory commissions (see Note 7).
Income Taxes
The operations of the Company are included in the consolidated federal
income tax return of Sprint. Federal income tax is calculated by the Company
on the basis of its filing a separate return.
Deferred income taxes are provided for certain temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for tax purposes (see Note 3).
Investment tax credits (ITC) related to regulated telephone property,
plant and equipment have been deferred and are being amortized over the
estimated useful lives of the related assets.
<PAGE>
Carolina Telephone & Telegraph Company
Form 10-K Part II
CAROLINA TELEPHONE AND TELEGRAPH COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996
2. EMPLOYEE BENEFIT PLANS
Defined Benefit Pension Plan
Substantially all employees of the Company are covered by a
noncontributory defined benefit pension plan. Benefits for plan participants
represented by collective bargaining units are based on negotiated schedules
of defined amounts. For participants not covered by collective bargaining
agreements, the plan provides pension benefits based on years of service and
participants' compensation.
The Company's policy is to make annual contributions to the plan equal
to an actuarially determined amount consistent with applicable federal tax
regulations. The funding objective is to accumulate funds at a relatively
stable rate over the participants' working lives so that benefits are fully
funded at retirement. At December 31, 1996, the plan's assets consisted
principally of investments in corporate equity securities and U.S. government
and corporate debt securities.
Pension costs or credits are determined for each subsidiary of Sprint
based on a direct calculation of service costs and projected benefit
obligations, and an appropriate allocation of unrecognized prior service
costs, transition asset and plan assets. Net periodic pension credits
recorded by the Company were $6,675,000, $7,341,000 and $5,125,000 in 1996,
1995 and 1994, respectively.
Defined Contribution Plans
Sprint sponsors defined contribution employee savings plans covering
substantially all employees of the Company. Participants may contribute
portions of their compensation to the plans. Contributions of participants
represented by collective bargaining units are matched by the Company based
upon defined amounts as negotiated by the respective parties. Contributions
of participants not covered by collective bargaining agreements are also
matched by the Company. For these participants, the Company provides matching
contributions in common stock equal to 50.0% of participants' contributions
up to 6.0% of their compensation. In addition, Sprint may, at the discretion
of the Board of Directors, provide additional matching contributions based on
the performance of Sprint's common stock compared with other
telecommunications companies. The Company's matching contributions were
$3,909,000, $3,598,000 and $3,258,000 in 1996, 1995 and 1994, respectively.
Postretirement Benefits
Sprint provides postretirement benefit (principally medical benefits)
arrangements covering substantially all employees of the Company. Employees
retiring before specified dates are eligible for these benefits at no cost or
reduced cost. Employees retiring after specified dates are eligible for these
benefits on a shared cost basis. The Company funds the accrued costs as
benefits are paid.
<PAGE>
Carolina Telephone & Telegraph Company
Form 10-K Part II
CAROLINA TELEPHONE AND TELEGRAPH COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996
2. EMPLOYEE BENEFIT PLANS (continued)
Postretirement Benefits (continued)
Net postretirement benefit costs are determined for each subsidiary of
Sprint based on a direct calculation of service costs and accumulated
postretirement benefit obligations and an appropriate allocation of
unrecognized prior service costs, unrecognized net gains and transition
obligation. Net postretirement benefit costs recorded by the Company were
$14,498,000, $17,457,000 and $14,121,000 in 1996, 1995 and 1994, respectively.
Postemployment Benefits
Effective January 1, 1994, the Company adopted SFAS No. 112, "Employers'
Accounting for Postemployment Benefits." Upon adoption, the Company
recognized certain previously unrecorded obligations for benefits being
provided to former or inactive employees and their dependents, after
employment but before retirement. The resulting charge did not significantly
impact the Company's financial statements. Such postemployment benefits
offered by the Company include severance, disability and worker's
compensation benefits, including the continuation of other benefits such as
health care and life insurance coverage.
3. INCOME TAXES
The components of income tax expense are as follows (in thousands):
1996 1995 1994
---- ---- ----
Current income tax expense
Federal $49,780 $54,744 $49,872
State 11,322 12,504 11,240
------- ------- -------
61,102 67,248 61,112
Deferred income tax expense (benefit)
Federal 7,234 (5,777) (1,912)
State 1,771 (1,023) 632
Amortization of deferred ITC - (1,938) (3,656)
------- ------- -------
9,005 (8,738) (4,936)
------- ------- -------
Total income tax expense $70,107 $58,510 $56,176
======= ======= =======
<PAGE>
Carolina Telephone & Telegraph Company
Form 10-K Part II
CAROLINA TELEPHONE AND TELEGRAPH COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996
3. INCOME TAXES (continued)
The differences which cause the effective income tax rate to vary from
the statutory federal income tax rate of 35 percent in 1996, 1995 and 1994
are as follows (in thousands):
1996 1995 1994
---- --- ----
Federal income tax provision at the
statutory rate $ 65,900 $ 55,455 $ 52,892
Less amortization of deferred ITC - 1,938 3,656
-------- -------- --------
Expected federal income tax
provision after amortization
of deferred ITC 65,900 53,517 49,236
Effect of
Reversal of rate differentials - (862) (972)
State income tax, net of federal
income tax effect 8,510 7,463 7,717
Other, net (4,303) (1,608) 195
-------- -------- --------
Income tax provision, including ITC $ 70,107 $ 58,510 $ 56,176
======== ======== ========
Effective income tax rate 37.2% 36.9% 37.2%
The income tax benefits allocated to other items are as follows
(in thousands):
1996 1995
---- ----
Extraordinary loss on discontinued
use of SFAS No. 71 $ - $51,523
Extraordinary losses on early
extinguishments of debt 2,728 -
Deferred income taxes are provided for the temporary differences between
the carrying amounts of the Company's assets and liabilities for financial
statement purposes and their tax bases. The sources of the differences that
give rise to the deferred income tax assets and liabilities as of December
31, 1996 and 1995, along with the income tax effect of each, are as follows
(in thousands):
1996 1995
Deferred Income Tax Deferred Income Tax
Assets Liabilities Assets Liabilities
-------------------------------------------
Property, plant and equipment $ - $ 96,081 $ - $ 90,520
Postretirement and other benefits 21,227 - 19,807 -
Expense accruals 8,187 - 9,407 -
Prepaid pension costs - 19,998 - 17,233
Other, net 1,140 - 721 -
------- ------- ------- -------
$30,554 $116,079 $29,935 $107,753
<PAGE>
Carolina Telephone & Telegraph Company
Form 10-K Part II
CAROLINA TELEPHONE AND TELEGRAPH COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996
4. LONG-TERM DEBT
Long-term debt as of December 31 is as follows (in thousands):
Interest Rates 1996 1995
-------------- ---- ----
Debentures, maturities
1996 - 2000 4.50% - 6.63% $ 50,825 $ 63,433
2001 - 2005 6.13% - 7.25% 100,000 100,000
2013 - 2016 6.75% - 9.00% 50,000 100,000
Other notes, maturities
1996 - 1998 6.90% - 7.32% 22 87
Unamortized debt discount (1,374) (2,539)
------- -------
199,473 260,981
Less current maturities 842 12,672
------- -------
Long-term debt $198,631 $248,309
Long-term debt maturities during each of the next five years are as
follows (in thousands):
Year Amount
---- ------
1997 $ 842
1998 5
1999 -
2000 50,000
2001 -
As of December 31, 1996, the Company had lines of credit with banks
totaling $31,000,000; no borrowings were outstanding. The bank lines, which
are renewable in May 1997, provide for short-term borrowings at market rates
of interest and require annual commitment fees. Lines of credit may be
withdrawn by the banks if there is a material adverse change in the financial
condition of Sprint or the Company.
The Company's short-term financing was provided by Sprint in 1996. The
weighted average interest rates on short-term borrowings in 1996, 1995 and
1994 were 5.5 percent, 5.9 percent and 4.6 percent, respectively.
The Company is in compliance with all restrictive or financial covenants
relating to its debt arrangements at December 31, 1996.
<PAGE>
Carolina Telephone & Telegraph Company
Form 10-K Part II
CAROLINA TELEPHONE AND TELEGRAPH COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996
4. LONG-TERM DEBT (continued)
During 1996, the Company redeemed prior to scheduled maturities
$50,000,000 of debentures with an interest rate of 9.0 percent. Prepayment
penalties incurred in connection with early extinguishments of debt and the
write-off of related debt issuance costs, net of the related income tax
benefits, are reflected as an extraordinary loss in the consolidated
statements of income.
5. COMMITMENTS AND CONTINGENCIES
Gross rental expense aggregated $6,859,000, $6,171,000 and $4,614,000 in
1996, 1995 and 1994, respectively. Minimum rental commitments as of December
31, 1996 are as follows (in thousands):
1997 $646
1998 327
1999 276
2000 206
2001 176
Thereafter 31
Various lawsuits arising in the ordinary course of business are pending
against the Company. Management cannot predict the ultimate outcome of these
actions, but believes they will not result in a material effect on the
Company's financial statements.
<PAGE>
Carolina Telephone & Telegraph Company
Form 10-K Part II
CAROLINA TELEPHONE AND TELEGRAPH COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996
6. RELATED PARTY TRANSACTIONS
Related party transactions of the Company are as follows (in thousands):
Affiliate Company Transaction Description 1996 1995 1994
- -----------------------------------------------------------------------------
The Company:
- -----------------------------------------------------------------------------
North Supply Purchased telecommunications,
Company construction and maintenance
equipment and materials and
supplies. $44,653 $42,274 $55,609
- -----------------------------------------------------------------------------
Sprint Reimbursed affiliate for data
processing services, other
data-related costs and certain
management costs. 50,614 51,606 52,119
- -----------------------------------------------------------------------------
Sprint Entered into cash advance and
borrowing transactions.
Interest expense on advances.(1)
(1)Interest is computed on the
prior month's thirty-day average
commercial paper index, as
published in the Federal Reserve
Statistical Release H.15, plus
15 basis points. 3,583 491 -
- -----------------------------------------------------------------------------
Sprint Long Provided network access,
Distance Division operator, billing and
collection services and the
lease of network facilities. 23,576 21,715 20,558
- -----------------------------------------------------------------------------
Sprint Long Received interexchange tele-
Distance Division communications services. 4,321 8,063 15,669
- -----------------------------------------------------------------------------
Sprint Publishing Received fees for the right to
and Advertising publish telephone directories
in the Company's territory,
listing and billing and
collection services. 22,529 22,448 21,607
- -----------------------------------------------------------------------------
Other Sprint Local Received reimbursement for
Operating Companies certain salaries and other
costs incurred for the benefit
of its affiliates (net). 7,546 4,691 690
- -----------------------------------------------------------------------------
<PAGE>
Carolina Telephone & Telegraph Company
Form 10-K Part II
CAROLINA TELEPHONE AND TELEGRAPH COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996
6. RELATED PARTY TRANSACTIONS (continued)
Affiliate Company Transaction Description 1996 1995 1994
- -----------------------------------------------------------------------------
The Company:
- -----------------------------------------------------------------------------
Sprint Mid-Atlantic Paid management fees for certain
Telecom, Inc. salaries and other costs incurred
by the management company on
behalf of the Company. 72,715 59,153 48,420
- -----------------------------------------------------------------------------
Centel Corporation Received dividends on in-
vestment in preferred stock. 14,282 6,632 -
- -----------------------------------------------------------------------------
Certain directors and officers of the Company are also directors or
officers of banks at which the Company conducts borrowings and related
transactions. The terms are comparable with other banks at which the Company
has similar transactions.
7. ADOPTION OF ACCOUNTING PRINCIPLES FOR A COMPETITIVE MARKETPLACE
Effective December 31, 1995, the Company determined that it no longer met
the criteria necessary for the continued application of the provisions of
SFAS No. 71. As a result of the decision to discontinue the application of
SFAS No. 71, the Company recorded a noncash, extraordinary charge of
$42,424,000, which is net of an income tax benefit of $51,523,000.
The Company's determination that it was no longer eligible for the
continued application of the accounting required by SFAS No. 71 was based on
changes in the regulatory framework, which continues to evolve from rate-base
regulation to price regulation and the convergence of competition in the
telecommunications industry. Based on these occurrences, the Company no
longer believed that it could be assured that prices could be maintained at
levels which would provide for the recovery of specific costs.
The components of the extraordinary charge recognized due to the
discontinued application of SFAS No. 71 are as follows (in thousands):
Pre-tax After-tax
------- ---------
Increase to the accumulated depreciation balance $ 103,277 $ 61,926
Recognition of switch software asset (15,772) (9,457)
Elimination of other net regulatory assets 6,442 3,863
-------- --------
Total $ 93,947 56,332
Tax-related net regulatory liabilities (13,225)
Accelerated amortization of investment tax credits (683)
--------
Extraordinary charge $ 42,424
<PAGE>
Carolina Telephone & Telegraph Company
Form 10-K Part II
CAROLINA TELEPHONE AND TELEGRAPH COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996
7. ADOPTION OF ACCOUNTING PRINCIPLES FOR A COMPETITIVE MARKETPLACE
(continued)
The adjustment to the accumulated depreciation balance was determined by
the completion of depreciation reserve and impairment studies. The
depreciation reserve study analyzed, by individual plant asset categories,
the impacts of regulator-prescribed depreciable asset lives compared with the
Company's estimated economic lives. The results identified the cumulative
under depreciation of certain asset categories. The impairment study, which
validated the results of the depreciation study, estimated the impact on
future revenues caused by price changes and developing industry competition
and the resulting effects on cash flows.
The discontinued application of SFAS No. 71 also required the Company to
eliminate from its consolidated balance sheet the effects of any actions of
regulators that had been recognized as assets and liabilities under SFAS No.
71, but would not have been recognized as assets and liabilities by
enterprises in general.
The tax-related adjustments were required to adjust deferred income tax
amounts to the currently enacted statutory rates and to eliminate tax-related
regulatory assets and liabilities. The Company uses the deferral method of
accounting for investment tax credits and amortizes the credits as a
reduction to tax expense over the life of the asset that gave rise to the tax
credit. Since plant asset lives were shortened, the investment tax credits
were adjusted to reduce the unamortized balance by a corresponding amount.
8. ADDITIONAL FINANCIAL INFORMATION
Restructuring Charge
In 1995, the Company initiated a restructuring in an effort to streamline
ertain processes and reduce costs in an increasingly competitive marketplace.
These actions resulted in the planned elimination of approximately 150
positions. As a result, the Company recorded an $8,079,000 nonrecurring
charge in 1995. The accrued liability related to this charge specifically
relates to the benefits that affected employees will receive upon termination.
Through 1996, approximately 70 positions have been eliminated resulting in
termination benefit payments of $2,521,000. Substantially all of the
remaining positions are expected to be eliminated during 1997, with the
related costs expected to be paid during 1997 and 1998.
Major Customer Information
Operating revenues from AT&T Corporation resulting primarily from
network access, billing and collection services and the lease of network
facilities aggregated $100,952,000, $107,605,000 and $109,074,000 during 1996,
1995 and 1994, respectively.
<PAGE>
Carolina Telephone & Telegraph Company
Form 10-K Part II
CAROLINA TELEPHONE AND TELEGRAPH COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996
8. ADDITIONAL FINANCIAL INFORMATION (continued)
Major Customer Information (continued)
The Company's customer and other accounts receivable are not subject to
significant concentration of credit risk due to the large number of customers
in the Company's customer base.
The principal industries in the Company's service area include
agriculture, textiles, chemicals and tourism. Military installations,
including Fort Bragg, Camp Lejeune, Cherry Point Marine Air Corps Station,
the U.S. Coast Guard Base in Elizabeth City and Pope Air Force Base
contribute significantly to the economy of the area.
Financial Instruments
The Company estimates the fair value of its financial instruments using
available market information and appropriate valuation methodologies.
Accordingly, the following estimates are not necessarily indicative of the
values the Company could realize in a current market exchange. Although
management is not aware of any factors that would affect the estimated fair
value amounts presented as of December 31, 1996, those amounts have not been
comprehensively revalued for purposes of these financial statements since
that date. Therefore, estimates of fair values subsequent to that date may
differ significantly from the amounts presented below.
The Company's financial instruments primarily consist of long-term debt,
including current maturities, with carrying amounts of $199,473,000 and
$260,981,000 and estimated fair values of $197,753,000 and $281,173,000 at
December 31, 1996 and 1995, respectively. The fair values of the Company's
long-term debt are estimated based on quoted market prices for publicly traded
issues. The carrying value of the Company's other financial instruments
appproximate fair value at December 31, 1996 and 1995.
The Company has not invested in derivative financial instruments.
<PAGE>
Carolina Telephone & Telegraph Company
Form 10-K Parts II/III/IV
CAROLINA TELEPHONE AND TELEGRAPH COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None
Item 10. Directors and Executive Officers of the Registrant
Omitted under the provisions of General Instruction I.
Item 11. Executive Compensation
Omitted under the provisions of General Instruction I.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Omitted under the provisions of General Instruction I.
Item 13. Certain Relationships and Related Transactions
Omitted under the provisions of General Instruction I.
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) 1. The consolidated financial statements of the Company filed as
part of this report are listed in the Index to Consolidated
Financial Statements on page 13.
2. The consolidated financial statement schedule of the Company
filed as part of this report is listed in the Index to
Consolidated Financial Statement Schedules on page 32.
(b) The Registrant was not required to file a report on Form 8-K
during the last quarter of 1996.
(c) The exhibits filed as part of this report are listed in the
Index to Exhibits on pages 34 - 36.
<PAGE>
Carolina Telephone & Telegraph Company
Form 10-K Part IV
CAROLINA TELEPHONE AND TELEGRAPH COMPANY
INDEX TO CONSOLIDATED FINANCIAL STATEMENT SCHEDULES
(ITEM 14(a)2.)
Page
For each of the three years in the period ended December 31, 1996: Reference
---------
Schedule II - Valuation and Qualifying Accounts - Consolidated Page 33
All other schedules have been omitted since the required information is not
present or is not present in amounts sufficient to require submission of the
schedule, or because the information required is included in the consolidated
financial statements, including the notes thereto.
<PAGE>
Carolina Telephone & Telegraph Company
Form 10-K Part IV
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS - CONSOLIDATED
Years Ended December 31, 1996, 1995 and 1994
(In thousands)
Deductions
----------
Additions Accounts
Balance at --------- charged off Balance
beginning Charged to net of at end
of year expense collections of year
----------- ---------- ----------- -------
Year ended December 31, 1996
- ----------------------------
Deducted from assets:
Allowance for uncollectible
accounts $2,348 $5,831 $4,673 $3,506
Year ended December 31, 1995
- ----------------------------
Deducted from assets:
Allowance for uncollectible
accounts $1,775 $3,474 $2,901 $2,348
Year ended December 31, 1994
- ----------------------------
Deducted from assets:
Allowance for uncollectible
accounts $1,938 $2,371 $2,534 $1,775
<PAGE>
Carolina Telephone & Telegraph Company
Form 10-K Part IV
INDEX TO EXHIBITS
ITEM 14(c)
Exhibit No.
3 Articles of incorporation and by-laws (filed as Exhibit 3 to 1980
Annual Report Form 10-K and incorporated herein by reference).
4 Instruments defining the rights of security holders, including
indentures, contained in documents previously filed with the
Securities and Exchange Commission are incorporated herein by
reference.
4(A) Indenture dated as of February 1, 1963, from the Company to
Bankers Trust Company, Trustee (See Current Report Form 8-K
for February 1963, Exhibit 4-F).
4(B) Indenture dated as of March 1, 1965, from the Company to
Bankers Trust Company, Trustee (See Current Report Form 8-K
for February 1965, Exhibit A).
4(C) Indenture dated as of March 1, 1966, from the Company to
Bankers Trust Company, Trustee (See Current Report Form 8-K
for March 1966, Exhibit A).
4(D) Indenture dated as of January 15, 1968, from the Company to
North Carolina National Bank as Trustee (See Registration
No. 2-27816, Exhibit 4-J).
4(E) Indenture dated as of October 1, 1970, from the Company to
Bankers Trust Company, as Trustee (See Registration No. 2-
38292, Exhibit 4-J).
4(F) Supplemental Indenture from the Company to Bankers Trust
Company dated as of March 28, 1969 supplementing Indenture
dated as of July 1, 1948 (See Registration No. 2-34018,
Exhibit 4-K).
4(G) Supplemental Indenture from the Company to Bankers Trust
Company dated as of March 28, 1969 supplementing Indenture
dated as of August 1, 1952 (See Registration No. 2-34018,
Exhibit 4-L).
4(H) Supplemental Indenture from the Company to Bankers Trust
Company dated as of March 28, 1969 supplementing Indenture
dated as of August 1, 1957 (See Registration No. 2-34018,
Exhibit 4-M).
<PAGE>
Carolina Telephone & Telegraph Company
Form 10-K Part IV
INDEX TO EXHIBITS (CONTINUED)
ITEM 14(c)
Exhibit No.
4(I) Supplemental Indenture from the Company to Bankers Trust
Company dated as of March 28, 1969 supplementing Indenture
dated as of February 1, 1963 (See Registration No. 2-34018,
Exhibit 4-N).
4(J) Supplemental Indenture from the Company to Bankers Trust
Company dated as of March 28, 1969 supplementing Indenture
dated as of March 1, 1965 (See Registration No. 2-34018,
Exhibit 4-O).
4(K) Supplemental Indenture from the Company to Bankers Trust
Company dated as of March 28, 1969 supplementing Indenture
dated as of March 1, 1966 (See Registration No. 2-34018,
Exhibit 4-P).
4(L) Supplemental Indenture from the Company to North Carolina
National Bank dated as of March 28, 1969 supplementing
Indenture dated as of January 15, 1968 (See Registration
No. 2-34018, Exhibit 4-Q).
4(M) Indenture dated as of August 1, 1969, from the Company to
Bankers Trust Company (See Registration No. 2-34018, Exhibit
4-A).
4(N) Indenture dated as of October 1, 1971, from the Company to
Bankers Trust Company (See Registration No. 2-41721, Exhibit
2-A).
4(O) Indenture dated as of November 1, 1973, from the Company to
Bankers Trust Company (See Registration No. 2-49251,
Exhibit 2-A).
4(P) Indenture dated as of May 1, 1978, from the Company to
Bankers Trust Company (See Registration No. 2-61151,
Exhibit 2-A).
4(Q) Indenture dated as of October 26, 1978, from the Company to
Bankers Trust Company (See Administrative Proceeding File
No. 3-5541, Exhibit 5).
4(R) Indenture dated as of December 27, 1979 from the Company to
Bankers Trust Company (See the Company's Application, File
Nos. 2-34018, 2-38292, 2-41721, 2-49251, and 2-61151,
Exhibit 5).
<PAGE>
Carolina Telephone & Telegraph Company
Form 10-K Part IV
INDEX TO EXHIBITS (CONTINUED)
ITEM 14(c)
Exhibit No.
4(S) Indenture dated as of May 15, 1986 from the Company to
Bankers Trust Company (See Amendment No. 1 to Registration
No. 33-5350, Exhibit 4-A).
4(T) Indenture dated as of December 1, 1992 from the Company to
Bankers Trust Company (See Registration No. 33-54936,
Exhibit 4).
4(U) Indenture dated as of August 15, 1993 from the Company to
Bankers Trust Company (See Registration No. 33-64476,
Exhibit 4).
12 Computation of Ratio of Earnings to Fixed Charges.
23 Consent of Ernst & Young LLP.
27 Financial Data Schedule.
<PAGE>
Carolina Telephone & Telegraph Company
Form 10-K Part IV
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 & TELEGRAPH COMPANY
Date: March 24, 1997 By s/F. E. Westmeyer
-------------- ---------------------------------------
F. E. Westmeyer, Vice President-Finance
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Date Signature and Title
---- -------------------
March 24, 1997 s/ W. E. McDonald
- -------------- ---------------------------------------
W. E. McDonald, President, Director
and Chief Executive Officer
March 24, 1997 s/ M. B. Fuller
- -------------- ---------------------------------------
M. B. Fuller, Director
March 24, 1997 s/ D. A. Jensen
- -------------- ---------------------------------------
D. A. Jensen, Director
<PAGE>
Exhibit 12
CAROLINA TELEPHONE AND TELEGRAPH COMPANY
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(Thousands of Dollars)
Years ended December 31,
1996 1995 1994 1993 1992
---------------------------------------------------
Income before extra-
ordinary items $118,178 $ 99,932 $ 94,944 $ 49,486 $72,800
Capitalized interest (209) (844) (140) (54) (632)
Income tax provision 70,107 58,510 56,176 26,837 40,430
-------- -------- -------- -------- --------
Subtotal 188,076 157,598 150,980 76,269 112,598
Fixed charges
Interest charges 21,471 23,257 22,245 21,960 22,167
Interest factor of
operating rents 1,554 1,280 1,039 2,320 2,048
-------- -------- -------- -------- --------
Total fixed charges 23,025 24,537 23,284 24,280 24,215
-------- -------- -------- -------- --------
Earnings, as adjusted $211,101 $182,135 $174,264 $100,549 $136,813
======== ======== ======== ======== ========
Ratio of earnings to
fixed charges 9.17 7.42* 7.48 4.14** 5.65
======== ======== ======== ======== ========
* In the absence of $8,079,000 of nonrecurring realignment and restructuring
costs, income before extraordinary items would have been $104,776,000, and
the ratio of earnings to fixed charges would have been 7.75 for the year
ended December 31, 1995.
** In the absence of $46,382,000 of nonrecurring merger and integration
costs related to the merger of Sprint and Centel, income before extra-
ordinary items would have been $77,251,000, and the ratio of earnings
to fixed charges would have been 6.05 for the year ended December 31,
1993.
NOTE: The above ratios have been computed by dividing fixed charges into
the sum of (a) income before extraordinary items 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>
Exhibit 23
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Carolina Telephone and Telegraph Company
We consent to the incorporation by reference in the Registration
Statement (Form S-3 No. 33-64476) of Carolina Telephone and Telegraph Company
and in the related Prospectus of our report dated January 22, 1997, with
respect to the consolidated financial statements and schedule of Carolina
Telephone and Telegraph Company included in this Annual Report (Form 10-K)
for the year ended December 31, 1996.
ERNST & YOUNG LLP
Kansas City, Missouri
March 25, 1997
<PAGE>
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