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 March 31, 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 March 31, 1998, and at the
date of filing of this report.
<PAGE>
CAROLINA TELEPHONE AND TELEGRAPH COMPANY
FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 1998
INDEX
<TABLE>
<CAPTION>
Page Number
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
Part II - Other Information
Item 1. Legal Proceedings 7
Item 2. Changes in Securities 7
Item 3. Defaults Upon Senior Securities 7
Item 4. Submission of Matters to a Vote of Security Holders 7
Item 5. Other Information 7
Item 6. Exhibits and Reports on Form 8-K 7
Signatures 8
Exhibits
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PART I.
Item 1.
CONSOLIDATED BALANCE SHEETS Carolina Telephone and Telegraph Company
(in thousands, except per share data)
- --------------------------------------------------------------------- -- ------------------ --- ------------------
March 31, December 31,
1998 1997
- --------------------------------------------------------------------- -- ------------------ --- ------------------
(unaudited)
Assets
Current assets
<S> <C> <C>
Cash $ 105 $ 104
Receivables
Customers and other, net of allowance of $4,773 and $4,818 120,687 123,019
Interexchange carriers 22,966 22,107
Affiliated companies 10,856 29,045
Inventories 17,097 11,295
Other 6,646 5,541
- --------------------------------------------------------------------- -- ------------------ --- ------------------
Total current assets 178,357 191,111
- --------------------------------------------------------------------- -- ------------------ --- ------------------
Property, plant and equipment 2,087,995 2,055,464
Less accumulated depreciation 1,178,675 1,158,542
- --------------------------------------------------------------------- -- ------------------ --- ------------------
Net property, plant and equipment 909,320 896,922
- --------------------------------------------------------------------- -- ------------------ --- ------------------
Prepaid pension 79,943 61,779
- --------------------------------------------------------------------- -- ------------------ --- ------------------
Deferred charges and other assets 36,381 36,953
- --------------------------------------------------------------------- -- ------------------ --- ------------------
Total $ 1,204,001 $ 1,186,765
-- ------------------ --- ------------------
Liabilities and Shareholder's Equity
Current liabilities
Outstanding checks in excess of cash balances $ 9,540 $ 16,694
Advances from parent 130,796 152,393
Accounts payable
Vendors and other 21,829 15,682
Interexchange carriers 33,665 20,366
Affiliated companies 12,422 26,479
Advance billings and customer deposits 19,355 17,376
Other 39,131 19,417
- --------------------------------------------------------------------- -- ------------------ --- ------------------
Total current liabilities 266,738 268,407
- --------------------------------------------------------------------- -- ------------------ --- ------------------
Long-term debt 198,860 198,813
- --------------------------------------------------------------------- -- ------------------ --- ------------------
Deferred credits and other liabilities
Deferred income taxes and investment tax credits 100,323 98,064
Postretirement and other benefit obligations 86,790 73,413
Other 864 1,702
- --------------------------------------------------------------------- -- ------------------ --- ------------------
Total deferred credits and other liabilities 187,977 173,179
- --------------------------------------------------------------------- -- ------------------ --- ------------------
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 402,152 398,092
- --------------------------------------------------------------------- -- ------------------ --- ------------------
Total shareholder's equity 550,426 546,366
- --------------------------------------------------------------------- -- ------------------ --- ------------------
Total $ 1,204,001 $ 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)
- --------------------------------------------------- ------------------------------- ------------------------------
Three Months Ended March 31, 1998 1997
- --------------------------------------------------- --- ----------- -- ------------ -- ------------ -- -----------
<S> <C> <C>
Net Operating Revenues $ 217,270 $ 202,862
Operating Expenses
Costs of services and products 89,822 80,236
Selling, general and administrative 50,174 39,144
Depreciation and amortization 34,286 34,557
- --------------------------------------------------- --- ----------- -- ------------ -- ------------ -- -----------
Total operating expenses 174,282 153,937
- --------------------------------------------------- --- ----------- -- ------------ -- ------------ -- -----------
Operating Income 42,988 48,925
Interest expense (5,214) (5,318)
Other income, net 3,430 3,888
- --------------------------------------------------- --- ----------- -- ------------ -- ------------ -- -----------
Income before income taxes 41,204 47,495
Income taxes (15,022) (17,879)
- --------------------------------------------------- --- ----------- -- ------------ -- ------------ -- -----------
Net Income 26,182 29,616
Retained Earnings at Beginning of Period 398,092 366,466
Dividends declared (22,122) (23,028)
- --------------------------------------------------- --- ----------- -- ------------ -- ------------ -- -----------
Retained Earnings at End of Period $ 402,152 $ 373,054
-- ------------ -- -----------
See accompanying Condensed Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PART I.
Item 1.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Carolina Telephone and Telegraph Company
(in thousands)
- ------------------------------------------------------------------------------- --- ------------- -- -------------
Three Months Ended March 31, 1998 1997
- ------------------------------------------------------------------------------- --- ------------- -- -------------
Operating Activities
<S> <C> <C>
Net income $ 26,182 $ 29,616
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 34,286 34,557
Deferred income taxes and investment tax credits 717 5,429
Changes in assets and liabilities:
Receivables, net 19,662 3,791
Inventories and other current assets (5,483) (505)
Accounts payable, accrued expenses and other current liabilities 19,933 8,520
Other assets and liabilities, net (4,935) (3,325)
- ------------------------------------------------------------------------------- --- ------------- -- -------------
Net cash provided by operating activities 90,362 78,083
- ------------------------------------------------------------------------------- --- ------------- -- -------------
Investing Activities
Capital expenditures (46,447) (46,736)
Other, net (237) (801)
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Net cash used by investing activities (46,684) (47,537)
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Financing Activities
Decrease in advances from parent (21,597) (7,571)
Dividends paid (22,122) (23,028)
Other, net 42 43
- ------------------------------------------------------------------------------- --- ------------- -- -------------
Net cash used by financing activities (43,677) (30,556)
- ------------------------------------------------------------------------------- --- ------------- -- -------------
Increase (Decrease) in Cash and Equivalents 1 (10)
Cash and Equivalents at Beginning of Period 104 414
- ------------------------------------------------------------------------------- --- ------------- -- -------------
Cash and Equivalents at End of Period $ 105 $ 404
--- ------------- -- -------------
Supplemental Cash Flow Information
Cash paid for interest, net of amounts capitalized $ 4,965 $ 5,106
--- ------------- -- -------------
Cash paid (refunded) for income taxes $ 3,771 $ (4,851)
--- ------------- -- -------------
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 Carolina Telephone and Telegraph
Company 1997 annual report on Form 10-K. Operating results for first quarter
1998 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.
Results of Operations
<TABLE>
<CAPTION>
Selected Operating Results
---------------------------------------------------------------------
Three Months Ended
March 31, Variance
---------------------------------- ------------------------------
1998 1997 Dollar %
--- ------------- -- ------------- ------------- ----------------
- -------------------------------------------- ---------------------------------------------------------------------
(in thousands)
Net Operating Revenues
<S> <C> <C> <C> <C>
Local service $ 101,122 $ 93,691 $ 7,431 7.9 %
Network access 60,176 57,183 2,993 5.2 %
Toll service 6,061 9,987 (3,926) (39.3)%
Other 49,911 42,001 7,910 18.8 %
- -------------------------------------------- --- ------------- -- ------------- --- -------------
Net operating revenues 217,270 202,862 14,408 7.1 %
- -------------------------------------------- --- ------------- -- ------------- --- -------------
Operating Expenses
Costs of services and products 89,822 80,236 9,586 11.9 %
Selling, general and administrative 50,174 39,144 11,030 28.2 %
Depreciation and amortization 34,286 34,557 (271) (0.8)%
- -------------------------------------------- --- ------------- -- ------------- --- -------------
Total operating expenses 174,282 153,937 20,345 13.2 %
- -------------------------------------------- --- ------------- -- ------------- --- -------------
Operating Income $ 42,988 $ 48,925 $ (5,937) (12.1)%
--- ------------- -- ------------- --- -------------
Operating Margin 19.8% 24.1%
--- ------------- -- -------------
</TABLE>
<PAGE>
Net Operating Revenues
Net operating revenues increased 7% in first quarter 1998 compared with the same
period a year ago. This increase was mainly due to customer line access growth
of 5.2% during the past 12 months.
Local service revenues, derived from local exchange services, increased 8% in
first quarter 1998 from the same 1997 period. This increase reflects strong
economic growth in CT&T's service areas and increases in second-line service for
residential customers to meet their lifestyle and data access needs. Local
service revenues also increased because of demand for network-based services
such as Caller ID and Call Waiting as well as an increase in wiring maintenance
agreements.
Network access revenues, derived from interexchange long distance carriers' use
of the local network to complete calls, increased 5% in first quarter 1998
compared with the same 1997 period. The 1998 first quarter revenues reflect an
8% growth in access 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, or local access transport areas
(LATAs). First quarter 1998 revenues decreased 39% compared with the same 1997
period. The decrease reflects extended local calling areas and increased
competition in the intrastate long distance market.
Other revenues are mainly derived from telecommunications equipment sales,
directory sales and listing services, and billing and collection services.
During the 1998 first quarter these revenues increased 19% compared with the
same 1997 period. This was due to an increase in equipment sales and expanded
operations of locating underground utility lines, partly offset by a decrease
due to 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.
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 12% in first quarter 1998 compared with the same period a year ago
because of customer access line growth and increased equipment sales. Costs of
services and products was 41.3% of net operating revenues in the 1998 first
quarter and 39.6% for the same period a year ago.
Selling, general and administrative (SG&A) expense increased 28% in first
quarter 1998 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 expanded operations of
locating underground utility lines. SG&A expense was 23.1% of net operating
revenues in the first quarter 1998 and 19.2% for the same period a year ago.
Depreciation and amortization expense decreased 1% in first quarter 1998
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 15.8% of net operating revenues in the first quarter
1998 and 17.1% for the same period a year ago.
<PAGE>
PART II.
Other Information
Item 1. Legal Proceedings
There were no reportable events during the quarter ended March 31,
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
CT&T's ratios of earnings to fixed charges were 8.46 and 9.07 for the
1998 and 1997 first quarter, respectively. 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
March 31, 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: May 7, 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)
- -------------------------------------------- --- ------------- -- ------------- --- ------------- -- -------------
Three Months Ended March 31, 1998 1997
- -------------------------------------------- --- ------------- -- ------------- --- ------------- -- -------------
(in thousands)
Earnings
<S> <C> <C>
Income before income taxes $ 41,204 $ 47,495
Capitalized interest (17) (38)
- -------------------------------------------- --- ------------- -- ------------- --- ------------- -- -------------
Subtotal 41,187 47,457
- -------------------------------------------- --- ------------- -- ------------- --- ------------- -- -------------
Fixed charges
Interest charges 5,231 5,356
Interest factor of operating rents 292 525
- -------------------------------------------- --- ------------- -- ------------- --- ------------- -- -------------
Total fixed charges 5,523 5,881
- -------------------------------------------- --- ------------- -- ------------- --- ------------- -- -------------
Earnings, as adjusted $ 46,710 $ 53,338
--- ------------- -- -------------
Ratio of earnings to fixed charges 8.46 9.07
--- ------------- -- -------------
</TABLE>
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> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> Dec-31-1998
<PERIOD-END> Mar-31-1998
<CASH> 105
<SECURITIES> 0
<RECEIVABLES> 148,426
<ALLOWANCES> 4,773
<INVENTORY> 17,097
<CURRENT-ASSETS> 178,357
<PP&E> 2,087,995
<DEPRECIATION> 1,178,675
<TOTAL-ASSETS> 1,204,001
<CURRENT-LIABILITIES> 266,738
<BONDS> 198,860
0
0
<COMMON> 72,530
<OTHER-SE> 477,896
<TOTAL-LIABILITY-AND-EQUITY> 1,204,001
<SALES> 0
<TOTAL-REVENUES> 217,270
<CGS> 0
<TOTAL-COSTS> 124,108
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,214
<INCOME-PRETAX> 41,204
<INCOME-TAX> 15,022
<INCOME-CONTINUING> 26,182
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 26,182
<EPS-PRIMARY> 0.00
<EPS-DILUTED> 0.00
</TABLE>
