UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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 common shares outstanding at September 30, 1997.
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CAROLINA TELEPHONE AND TELEGRAPH COMPANY
FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 1997
INDEX
Page Number
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)
September 30, December 31,
1997 1996
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(unaudited)
Assets
Current assets
<S> <C> <C>
Cash $ 19,445 $ 414
Accounts receivable
Customers and other, net of allowance for doubtful accounts
of $3,581 and $3,506 117,818 107,193
Interexchange carriers 23,895 23,174
Affiliated companies 7,205 8,847
Inventories 10,665 9,118
Prepaid expenses and other 4,344 5,011
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Total current assets 183,372 153,757
Property, plant and equipment 2,034,517 1,939,608
Less accumulated depreciation 1,137,431 1,062,982
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897,086 876,626
Investment in affiliate preferred stock 29,043 29,043
Deferred charges and other assets 66,229 58,618
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$ 1,175,730 $ 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, except per share data)
September 30, December 31,
1997 1996
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(unaudited)
Liabilities and shareholder's equity
<S> <C> <C>
Current liabilities
Outstanding checks in excess of cash balances $ 10,362 $ 2,956
Advances from parent company 143,289 137,002
Current maturities of long-term debt 10 842
Accounts payable
Vendors and other 14,214 17,993
Interexchange carriers 22,790 18,911
Affiliated companies 29,373 18,902
Accrued taxes 14,377 6,132
Advance billings and customer deposits 17,788 16,869
Other 19,154 24,874
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Total current liabilities 271,357 244,481
Long-term debt 198,766 198,631
Deferred credits and other liabilities
Deferred income taxes and investment tax credits 93,823 89,513
Postretirement and other benefit obligations 70,507 62,740
Other 1,621 7,939
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165,951 160,192
Common stock and other shareholder's equity
Common stock, par value $20 per share, authorized - 5,000 shares,
issued and outstanding 3,627 shares 72,530 72,530
Capital in excess of par value 75,744 75,744
Retained earnings 391,382 366,466
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539,656 514,740
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$ 1,175,730 $ 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)
Quarter Ended Year to Date
September 30, September 30,
--------------------------------------------------------------
1997 1996 1997 1996
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Net operating revenues
<S> <C> <C> <C> <C>
Local service $ 98,932 $ 91,175 $ 290,226 $ 259,071
Network access 58,510 62,552 175,994 178,664
Toll service 8,909 14,471 27,829 47,965
Telecommunications equipment 18,960 17,665 52,634 49,427
Other 27,914 31,928 92,618 90,742
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Total net operating revenues 213,225 217,791 639,301 625,869
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Operating expenses
Plant operations 49,907 59,741 155,129 165,841
Depreciation and amortization 35,689 33,528 105,658 101,215
Customer operations 38,410 37,553 113,773 102,686
Corporate operations 17,576 18,229 53,637 53,059
Cost of telecommunications equipment 12,254 12,187 35,795 34,056
Other 5,234 4,866 15,170 14,310
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Total operating expenses 159,070 166,104 479,162 471,167
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Operating income 54,155 51,687 160,139 154,702
Interest expense (5,913) (6,032) (16,717) (16,325)
Other income, net 3,439 3,593 10,801 10,684
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Income before income taxes and extraordinary item 51,681 49,248 154,223 149,061
Income taxes (18,997) (19,285) (57,321) (56,568)
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Income before extraordinary item 32,684 29,963 96,902 92,493
Extraordinary loss on early extinguishment of
debt, net - (3,750) - (3,750)
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Net income $ 32,684 $ 26,213 $ 96,902 $ 88,743
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CONSOLIDATED STATEMENTS OF RETAINED EARNINGS (UNAUDITED)
(in thousands)
Year to Date
September 30,
----------------------------------
1997 1996
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Retained earnings at beginning of period $ 366,466 $ 342,746
Net Income 96,902 88,743
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463,368 431,489
Dividends declared (71,986) (66,439)
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Retained earnings at end of period $ 391,382 $ 365,050
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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
September 30,
----------------------------------
1997 1996
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Operating activities
<S> <C> <C>
Net income $ 96,902 $ 88,743
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 105,658 101,215
Extraordinary loss on early extinguishment of debt - 4,713
Deferred income taxes and investment tax credits 3,980 6,008
Changes in assets and liabilities:
Accounts receivable, net (9,704) (37,192)
Inventories and other current assets (1,760) (3,342)
Accounts payable and other current liabilities 21,421 6,393
Noncurrent assets and liabilities, net (3,309) (900)
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Net cash provided by operating activities 213,188 165,638
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Investing activities
Capital expenditures (124,110) (126,285)
Other, net (3,651) (1,884)
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Net cash used by investing activities (127,761) (128,169)
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Financing activities
Increase in advances from parent company 6,287 134,711
Payments on long-term debt (697) (62,668)
Decrease in short-term borrowings - (42,800)
Dividends paid (71,986) (66,439)
Other, net - 3
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Net cash used by financing activities (66,396) (37,193)
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Increase in cash 19,031 276
Cash at beginning of period 414 54
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Cash at end of period $ 19,445 $ 330
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Supplemental cash flow information
Cash paid for interest (excluding amounts capitalized) $ 16,293 $ 16,839
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Cash paid for taxes $ 44,491 $ 50,968
----------------------------------
See accompanying Condensed Notes to Consolidated Financial Statements
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PART I.
Item 1.
CAROLINA TELEPHONE AND TELEGRAPH COMPANY
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
September 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.
2. Early Extinguishment of Debt
In July 1996, the Company redeemed $50 million of debentures with an interest
rate of 9.0% prior to scheduled maturity. The extraordinary loss on the early
extinguishment of debt was $3.8 million, net of an income tax benefit of $3.0
million.
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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) includes certain estimates, projections and other forward-looking
statements in its reports, in presentations to analysts and others, and in other
publicly-available material. 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 utility commissions (PUCs)
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 PUCs. 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 customers
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 delayed, 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.
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Results of Operations
Year-to-date net operating revenues for 1997 increased 2% 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.
Local service revenues, derived from local exchange services, increased 12% for
the 1997 year-to-date period compared with the same 1996 period. The increase
was mainly due to growth of 4.6% in access lines served during the last 12
months and extended local area calling plans. The increase also reflects
increased demand for custom calling features, such as Caller ID, call waiting
and call forwarding, and increased revenues from residential and business wire
maintenance.
Toll service revenues are mainly derived from providing long distance services
within specified geographical areas. These year-to-date 1997 revenues decreased
42% from the same period a year ago. The decrease was mainly due to reduced
revenues from reselling interexchange long distance services, which were 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 expenses increased 2%
compared with the same period a year ago. This reflects an increase in customer
operations expense, partly offset by a decrease in plant operations expense. The
increase in customer operations expense was mainly due to the expanded
operations of locating underground utility lines and increased sales and
marketing costs to promote products and services. The decrease in plant
operations expense is mainly due to the phase out of the interexchange long
distance reseller service through early 1997.
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PART II.
Other Information
Item 1. Legal Proceedings
There were no reportable events during the quarter ended September 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 8.88 and 9.80 for the
1997 and 1996 third quarter, respectively, and 9.30 and 9.19 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
income taxes and extraordinary item, 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
September 30, 1997.
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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/ John I. Lehman
John I. Lehman
Controller & Chief Accounting Officer
By /s/ Douglas B. Lynn
Douglas B. Lynn
Assistant Vice President
Date: November 10, 1997
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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)
Quarter Ended Year to Date
September 30, September 30,
---------------------------------------------------------------------
1997 1996 1997 1996
- ------------------------------------------------------------------------------------------------------------------
Earnings
<S> <C> <C> <C> <C>
Income before income taxes and
extraordinary item $ 51,681 $ 49,248 $ 154,223 $ 149,061
Capitalized interest 105 881 (51) (168)
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Subtotal 51,786 50,129 154,172 148,893
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Fixed charges
Interest charges 5,808 5,151 16,768 16,493
Interest factor of operating rents 766 547 1,800 1,691
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Total fixed charges 6,574 5,698 18,568 18,184
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Earnings, as adjusted $ 58,360 $ 55,827 $ 172,740 $ 167,077
---------------------------------------------------------------------
Ratio of earnings to fixed charges 8.88 9.80 9.30 9.19
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</TABLE>
Note: These ratios were computed by dividing fixed charges into the sum of
(a) income before income taxes and extraordinary item, 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> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> Dec-31-1997
<PERIOD-END> Sep-30-1997
<CASH> 19,445
<SECURITIES> 0
<RECEIVABLES> 152,499
<ALLOWANCES> 3,581
<INVENTORY> 10,665
<CURRENT-ASSETS> 183,372
<PP&E> 2,034,517
<DEPRECIATION> 1,137,431
<TOTAL-ASSETS> 1,175,730
<CURRENT-LIABILITIES> 271,357
<BONDS> 198,766
0
0
<COMMON> 72,530
<OTHER-SE> 467,126
<TOTAL-LIABILITY-AND-EQUITY> 1,175,730
<SALES> 0
<TOTAL-REVENUES> 639,301
<CGS> 0
<TOTAL-COSTS> 374,560
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 16,717
<INCOME-PRETAX> 154,223
<INCOME-TAX> 57,321
<INCOME-CONTINUING> 96,902
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 96,902
<EPS-PRIMARY> 0.00
<EPS-DILUTED> 0.00
</TABLE>
