UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
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
- --------------------------------------------------------------------------------
(Address of principal executive offices)
919-554-7900
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(Registrant's telephone number, including area code)
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed
since last report)
This registrant meets the conditions 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 were 3,626,510 common shares outstanding at June 30, 1998, and at the date
of filing of this report.
<PAGE>
CAROLINA TELEPHONE AND TELEGRAPH COMPANY
FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 1998
INDEX
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Page
Part I - Financial Information
Item 1. Consolidated Financial Statements
<S> <C>
Consolidated Balance Sheets 1
Consolidated Statements of Income and Retained Earnings 2
Consolidated Statements of Cash Flows 3
Condensed Notes to Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of Results of Operations 5
Item 3. Quantitative and Qualitative Disclosures About Market Risk 8
Part II - Other Information
Item 1. Legal Proceedings 9
Item 2. Changes in Securities 9
Item 3. Defaults Upon Senior Securities 9
Item 4. Submission of Matters to a Vote of Security Holders 9
Item 5. Other Information 9
Item 6. Exhibits and Reports on Form 8-K 9
Signatures 10
Exhibits
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PART I.
Item 1.
CONSOLIDATED BALANCE SHEETS Carolina Telephone and Telegraph Company
(in thousands, except per share data)
- --------------------------------------------------------------------- -- ------------------ --- ------------------
June 30, December 31,
1998 1997
- --------------------------------------------------------------------- -- ------------------ --- ------------------
(unaudited)
Assets
Current assets
<S> <C> <C>
Cash $ 2,361 $ 104
Accounts receivable
Customers and other, net of allowance for doubtful accounts
of $3,650 and $4,818 132,115 123,019
Interexchange carriers 23,286 22,107
Affiliated companies 7,461 29,045
Inventories 16,306 11,295
Other 3,268 5,541
- --------------------------------------------------------------------- -- ------------------ --- ------------------
Total current assets 184,797 191,111
- --------------------------------------------------------------------- -- ------------------ --- ------------------
Property, plant and equipment 2,129,929 2,055,464
Less accumulated depreciation 1,201,398 1,158,542
- --------------------------------------------------------------------- -- ------------------ --- ------------------
Net property, plant and equipment 928,531 896,922
- --------------------------------------------------------------------- -- ------------------ --- ------------------
Prepaid pension 84,583 61,779
- --------------------------------------------------------------------- -- ------------------ --- ------------------
Deferred charges and other assets 36,610 36,953
- --------------------------------------------------------------------- -- ------------------ --- ------------------
Total $ 1,234,521 $ 1,186,765
-- ------------------ --- ------------------
Liabilities and Shareholder's Equity
Current liabilities
Outstanding checks in excess of cash balances $ 7,304 $ 16,694
Advances from parent 151,789 152,393
Accounts payable
Vendors and other 19,487 15,682
Interexchange carriers 24,663 20,366
Affiliated companies 24,010 26,479
Advance billings and customer deposits 21,402 17,376
Other 29,131 19,417
- --------------------------------------------------------------------- -- ------------------ --- ------------------
Total current liabilities 277,786 268,407
- --------------------------------------------------------------------- -- ------------------ --- ------------------
Long-term debt 198,907 198,813
- --------------------------------------------------------------------- -- ------------------ --- ------------------
Deferred credits and other liabilities
Deferred income taxes and investment tax credits 103,150 98,064
Postretirement and other benefit obligations 89,601 73,413
Other 887 1,702
- --------------------------------------------------------------------- -- ------------------ --- ------------------
Total deferred credits and other liabilities 193,638 173,179
- --------------------------------------------------------------------- -- ------------------ --- ------------------
Shareholder's equity
Common stock, par value $20 per share, 5,000 shares
authorized, 3,627 shares issued and outstanding 72,530 72,530
Capital in excess of par value 75,744 75,744
Retained earnings 415,916 398,092
- --------------------------------------------------------------------- -- ------------------ --- ------------------
Total shareholder's equity 564,190 546,366
- --------------------------------------------------------------------- -- ------------------ --- ------------------
Total $ 1,234,521 $ 1,186,765
-- ------------------ --- ------------------
See accompanying Condensed Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PART I.
Item 1.
CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS Carolina Telephone and Telegraph Company
(Unaudited)
(in thousands)
- --------------------------------------------------- ------------------------------- ------------------------------
Quarter Ended Year-to-Date
June 30, June 30,
------------------------------- ------------------------------
1998 1997 1998 1997
- --------------------------------------------------- --- ----------- -- ------------ -- ------------ -- -----------
<S> <C> <C> <C> <C>
Net Operating Revenues $ 225,637 $ 217,487 $ 442,907 $ 420,349
Operating Expenses
Costs of services and products 89,338 83,951 179,160 164,187
Selling, general and administrative 46,093 41,065 96,267 80,209
Depreciation and amortization 34,785 35,412 69,071 69,969
- --------------------------------------------------- --- ----------- -- ------------ -- ------------ -- -----------
Total operating expenses 170,216 160,428 344,498 314,365
- --------------------------------------------------- --- ----------- -- ------------ -- ------------ -- -----------
Operating Income 55,421 57,059 98,409 105,984
Interest expense (5,395) (5,486) (10,609) (10,804)
Other income, net 3,120 3,474 6,550 7,362
- --------------------------------------------------- --- ----------- -- ------------ -- ------------ -- -----------
Income before income taxes 53,146 55,047 94,350 102,542
Income taxes (19,799) (20,445) (34,821) (38,324)
- --------------------------------------------------- --- ----------- -- ------------ -- ------------ -- -----------
Net Income $ 33,347 $ 34,602 59,529 64,218
--- ----------- -- ------------
Retained Earnings at Beginning of Period 398,092 366,466
Dividends declared (41,705) (46,963)
- --------------------------------------------------- --- ----------- -- ------------ -- ------------ -- -----------
Retained Earnings at End of Period $ 415,916 $ 383,721
-- ------------ -- -----------
See accompanying Condensed Notes to Consolidated Financial Statements.
</TABLE>
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<TABLE>
<CAPTION>
PART I.
Item 1.
CONSOLIDATED STATEMENTS OF CASH FLOWS Carolina Telephone and Telegraph Company
(Unaudited)
(in thousands)
- ------------------------------------------------------------------------------- --- ------------- -- -------------
Year-to-Date June 30, 1998 1997
- ------------------------------------------------------------------------------- --- ------------- -- -------------
Operating Activities
<S> <C> <C>
Net income $ 59,529 $ 64,218
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 69,071 69,969
Deferred income taxes and investment tax credits 6,585 6,603
Changes in assets and liabilities:
Receivables, net 11,309 (9,029)
Inventories and other current assets (4,404) 2,330
Accounts payable, accrued expenses and other current liabilities 9,989 248
Other assets and liabilities, net (6,833) (5,167)
- ------------------------------------------------------------------------------- --- ------------- -- -------------
Net cash provided by operating activities 145,246 129,172
- ------------------------------------------------------------------------------- --- ------------- -- -------------
Investing Activities
Capital expenditures (99,808) (90,318)
Other, net (872) (1,321)
- ------------------------------------------------------------------------------- --- ------------- -- -------------
Net cash used by investing activities (100,680) (91,639)
- ------------------------------------------------------------------------------- --- ------------- -- -------------
Financing Activities
Increase (Decrease) in advances from parent (604) 12,603
Dividends paid (41,705) (46,963)
- ------------------------------------------------------------------------------- --- ------------- -- -------------
Net cash used by financing activities (42,309) (34,360)
- ------------------------------------------------------------------------------- --- ------------- -- -------------
Increase in Cash and Equivalents 2,257 3,173
Cash and Equivalents at Beginning of Period 104 414
- ------------------------------------------------------------------------------- --- ------------- -- -------------
Cash and Equivalents at End of Period $ 2,361 $ 3,587
--- ------------- -- -------------
Supplemental Cash Flow Information
Cash paid for interest, net of amounts capitalized $ 10,321 $ 10,578
--- ------------- -- -------------
Cash paid for income taxes $ 25,213 $ 21,659
--- ------------- -- -------------
See accompanying Condensed Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
PART I.
Item 1.
CONDENSED NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS Carolina Telephone and Telegraph Company
(Unaudited)
The information in this Form 10-Q has been prepared according to the rules and
regulations of the Securities and Exchange Commission. In management's opinion,
these consolidated interim financial statements reflect all adjustments
(consisting only of normal recurring accruals) necessary to present fairly
Carolina Telephone and Telegraph Company's consolidated financial position,
results of operations and cash flows.
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 the Carolina Telephone and
Telegraph Company 1997 annual report on Form 10-K. Operating results for the
1998 year-to-date period are not necessarily indicative of operating results
that may be expected for the year ending December 31, 1998.
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 (Sprint); as a result, earnings per share
information has been omitted.
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, and the reported amounts of revenues and expenses. Actual results
could differ from those estimates.
Certain prior-year amounts have been reclassified to conform to the
current-period presentation. These reclassifications had no effect on the
results of operations or shareholder's equity as previously reported.
<PAGE>
PART I.
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS Carolina Telephone and Telegraph Company
General
Carolina Telephone and Telegraph Company, with 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 ensured. 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 or latitude allowed its competitors by
the Federal Communications Commission (FCC) or North Carolina
Utilities Commission under the Telecommunications Act of 1996;
- 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 changes in political, economic or other factors
such as legal and regulatory changes or other external factors over
which CT&T has no control.
The words "estimate", "project", "intend", "expect", "believe" and similar
expressions are intended to identify forward-looking statements. These
forward-looking statements are found at various places throughout Management's
Discussion and Analysis of Financial Condition and Results of Operations.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date hereof. CT&T undertakes no
obligation to publicly release any revisions to these forward-looking statements
to reflect events or circumstances after the date hereof or to reflect the
occurrence of unanticipated events. Moreover, CT&T, through senior management,
may from time to time make forward-looking statements about the matters
described herein or other matters concerning CT&T.
<PAGE>
Results of Operations
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<CAPTION>
Selected Operating Results
---------------------------------------------------------------------
Year-to-Date
June 30, Variance
--- ------------- -- ------------- ------------- ----------------
1998 1997 Dollar %
- -------------------------------------------- ---------------------------------------------------------------------
(in thousands)
Net Operating Revenues
<S> <C> <C> <C> <C>
Local service $ 207,284 $ 191,294 $ 15,990 8.4%
Network access 121,553 117,484 4,069 3.5%
Toll service 12,062 18,920 (6,858) (36.2)%
Other 102,008 92,651 9,357 10.1%
- -------------------------------------------- --- ------------- -- ------------- --- -------------
Net operating revenues 442,907 420,349 22,558 5.4%
- -------------------------------------------- --- ------------- -- ------------- --- -------------
Operating Expenses
Costs of services and products 179,160 164,187 14,973 9.1%
Selling, general and administrative 96,267 80,209 16,058 20.0%
Depreciation and amortization 69,071 69,969 (898) (1.3)%
- -------------------------------------------- --- ------------- -- ------------- --- -------------
Total operating expenses 344,498 314,365 30,133 9.6%
- -------------------------------------------- --- ------------- -- ------------- --- -------------
Operating Income $ 98,409 $ 105,984 $ (7,575) (7.1)%
--- ------------- -- ------------- --- -------------
Operating Margin 22.2% 25.2%
--- ------------- -- -------------
</TABLE>
Net Operating Revenues
Net operating revenues increased 5% in the 1998 year-to-date period compared
with the same 1997 period. This increase mainly reflects customer access line
growth of 5.0% during the past 12 months, offset by decreases in toll service
revenues.
Local service revenues, derived from local exchange services, increased 8% in
the 1998 year-to-date period from the same 1997 period. Local service revenues
increased because of continued demand for network-based services such as Caller
ID and Call Waiting. This increase also reflects increased sales of private line
services and maintenance of customer wiring and equipment.
Network access revenues, derived from interexchange long distance carriers' use
of the local network to complete calls, increased 3% in the 1998 year-to-date
period compared with the same 1997 period. The 1998 revenue reflects an 8%
growth in minutes of use, partly offset by FCC-mandated access rate reductions.
Toll service revenues are mainly derived from providing long distance services
within specified regional calling areas that are beyond the local calling area.
Year-to-date 1998 toll service revenues declined 36% compared with the same 1997
period. This decrease reflects extended local calling areas and increased
competition in the intrastate long distance market. These losses were, in part,
offset by increases in the division's local service revenues and network access
revenues. In addition, Sprint's long distance division has acquired some of the
customer base to help mitigate the erosion of these revenues.
Other revenues include telecommunications equipment sales, directory sales and
listing services, billing and collection services, and services to locate
underground utility lines. During the 1998 year-to-date period, other revenues
increased 10% compared with the same 1997 period. This was mainly due to
increases in equipment sales and expanded operations of locating underground
utility lines. Partly offsetting these increases were decreases from a July 1997
change in transfer pricing for certain transactions between CT&T and Sprint's
product distribution and directory publishing division to more accurately
reflect market pricing.
<PAGE>
Operating Expenses
Costs of services and products consists of costs related to operating and
maintaining the local network and costs of equipment sales. These expenses
increased 9% in the 1998 year-to-date period compared with the same period a
year ago. This reflects continued cost control, while still supporting customer
access line growth and increased equipment sales. Costs of services and products
were 40.5% of net operating revenues in the 1998 year-to-date period and 39.1%
for the same period a year ago.
Selling, general and administrative (SG&A) expense increased 20% in the 1998
year-to-date period compared with the same 1997 period. This increase was due to
increased customer service costs related to access line growth, increased
marketing costs to promote new products and services, and the expanded
operations of locating underground utility lines. SG&A expense was 21.7% of net
operating revenues in the 1998 year-to-date period and 19.0% for the same period
a year ago.
Depreciation and amortization expense decreased 1% in the 1998 year-to-date
period compared with the same 1997 period. This decrease reflects new
depreciation rates that align expense recognition with plans for plant
replacement. This decline was partly offset by an increase in plant additions.
Depreciation and amortization expense was 15.6% of net operating revenues in the
1998 year-to-date period and 16.7% for the same period a year ago.
<PAGE>
PART I
Item 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK Carolina Telephone and Telegraph Company
Omitted under the provisions of General Instruction H.
<PAGE>
PART II.
Other Information
Item 1. Legal Proceedings
There were no reportable events during the quarter ended June 30,
1998.
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
For the 1998 second quarter and year-to-date periods, CT&T's ratios of
earnings to fixed charges was 10.32 and 9.40, respectively, versus
10.26 and 9.81 for the same 1997 periods. These ratios were computed
by dividing fixed charges into the sum of earnings (after certain
adjustments) and fixed charges. Earnings include income before income
taxes, less capitalized interest. Fixed charges include interest on
all debt (including amortization of debt issuance costs) and the
interest component of operating rents.
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are filed as part of this report:
(12) Computation of Ratio of Earnings to Fixed Charges
(27) Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended June
30, 1998.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Carolina Telephone and Telegraph Company
---------------------------------------------
(Registrant)
By /s/ John I. Lehman
---------------------------------------------
John I. Lehman
Controller & Chief Accounting Officer
By /s/ Douglas B. Lynn
---------------------------------------------
Douglas B. Lynn
Assistant Vice President
Date: August 11, 1998
<PAGE>
EXHIBIT INDEX
EXHIBIT
NUMBER
(12) Computation of Ratio of Earnings to Fixed Charges
(27) Financial Data Schedule
<TABLE>
<CAPTION>
EXHIBIT 12
CAROLINA TELEPHONE AND TELEGRAPH COMPANY
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES (Unaudited)
- -------------------------------------------- ---------------------------------- ----------------------------------
Quarter Ended Year-to-Date
June 30, June 30,
--- ------------- -- ------------- --- ------------- -- -------------
1998 1997 1998 1997
- -------------------------------------------- --- ------------- -- ------------- --- ------------- -- -------------
(in thousands)
Earnings
<S> <C> <C> <C> <C>
Income before income taxes $ 53,146 $ 55,047 $ 94,350 $ 102,542
Capitalized interest (12) (118) (29) (156)
- -------------------------------------------- --- ------------- -- ------------- --- ------------- -- -------------
Subtotal 53,134 54,929 94,321 102,386
- -------------------------------------------- --- ------------- -- ------------- --- ------------- -- -------------
Fixed charges
Interest charges 5,407 5,604 10,638 10,960
Interest factor of operating rents 293 331 585 663
- -------------------------------------------- --- ------------- -- ------------- --- ------------- -- -------------
Total fixed charges 5,700 5,935 11,223 11,623
- -------------------------------------------- --- ------------- -- ------------- --- ------------- -- -------------
Earnings, as adjusted $ 58,834 $ 60,864 $ 105,544 $ 114,009
--- ------------- -- ------------- --- ------------- -- -------------
Ratio of earnings to fixed charges 10.32 10.26 9.40 9.81
--- ------------- -- ------------- --- ------------- -- -------------
Note: These ratios were computed by dividing fixed charges into the sum of
earnings (after certain adjustments) and fixed charges. Earnings
include income before income taxes, less capitalized interest. Fixed
charges include interest on all debt (including amortization of debt
issuance costs) and the interest component of operating rents.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> Dec-31-1998
<PERIOD-END> Jun-30-1998
<CASH> 2,361
<SECURITIES> 0
<RECEIVABLES> 159,051
<ALLOWANCES> 3,650
<INVENTORY> 16,306
<CURRENT-ASSETS> 184,797
<PP&E> 2,129,929
<DEPRECIATION> 1,201,398
<TOTAL-ASSETS> 1,234,521
<CURRENT-LIABILITIES> 277,786
<BONDS> 198,907
0
0
<COMMON> 72,530
<OTHER-SE> 491,660
<TOTAL-LIABILITY-AND-EQUITY> 1,234,521
<SALES> 0
<TOTAL-REVENUES> 442,907
<CGS> 0
<TOTAL-COSTS> 248,231
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 10,609
<INCOME-PRETAX> 94,350
<INCOME-TAX> 34,821
<INCOME-CONTINUING> 59,529
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 59,529
<EPS-PRIMARY> 0.00
<EPS-DILUTED> 0.00
</TABLE>
