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, 1994
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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: 1-6469
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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, N.C. 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)
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(Former name, former address and former fiscal year, if
changed since last report)
This registrant meets the conditions set forth in 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 (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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There are 3,626,510 shares of common stock, par value $20, outstanding as
of September 30, 1994 and as of the date of filing of this report.
-1-
CAROLINA TELEPHONE AND TELEGRAPH COMPANY
INDEX
Page Reference
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Part I. Financial Information
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets Page 2 - 3
Consolidated Statements of Income Page 4
Consolidated Statements of Cash Flows Pages 5 - 6
Notes to Consolidated Financial Statements Pages 7 - 8
Item 2. Management's Discussion and Analysis
of Financial Condition and Results
of Operations Pages 9 - 12
Part II. Other Information
Item 1. Legal Proceedings Page 13
Item 2. Changes in Securities Page 13
Item 3. Defaults Upon Senior Securities Page 13
Item 4. Submission of Matters to a Vote of
Security Holders Page 13
Item 5. Other Information Page 13
Item 6. Exhibits and Reports on Form 8-K Page 13
Signatures Page 14
Exhibit 12
Exhibit 27
Form 10-Q Part I.
Item 1.
-2-
CAROLINA TELEPHONE AND TELEGRAPH COMPANY
CONSOLIDATED BALANCE SHEETS
(Thousands of Dollars)
September 30, December 31,
1994 1993
------------ -----------
(Unaudited)
ASSETS
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CURRENT ASSETS
Cash $ 1 $ 1
Receivables, net of allowance for
doubtful accounts of $2,130
($1,895 at December 31, 1993):
Customers and other 78,531 63,090
Interexchange carriers 22,706 20,238
Affiliates 3,836 4,699
Inventories 11,653 9,807
Prepayments and other 4,137 870
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120,864 98,705
PROPERTY, PLANT AND EQUIPMENT
Land and buildings 131,671 128,635
Telephone network equipment and outside
plant 1,443,563 1,370,948
Other 85,712 78,455
Construction in progress 35,201 17,228
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1,696,147 1,595,266
Less accumulated depreciation 739,815 673,839
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956,332 921,427
DEFERRED CHARGES AND OTHER ASSETS 70,129 58,778
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$1,147,325 $1,078,910
========== ==========
(Continued)
Form 10-Q Part I.
Item 1.
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CAROLINA TELEPHONE AND TELEGRAPH COMPANY
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(Thousands of Dollars)
September 30, December 31,
1994 1993
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(Unaudited)
LIABILITIES AND STOCKHOLDER'S EQUITY
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CURRENT LIABILITIES
Outstanding checks in excess of cash
balances $ 2,549 $ 9,303
Current maturities of long-term debt 8,965 568
Short-term borrowings:
Commercial paper 44,400 41,100
Accounts payable:
Interexchange carriers 26,032 22,950
Affiliates 21,923 10,866
Vendors and other 24,194 20,742
Advance billings 12,265 11,653
Accrued taxes 13,815 13,298
Accrued merger and integration costs 5,669 17,035
Accrued vacation pay 8,557 10,550
Other 17,857 20,484
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186,226 178,549
LONG-TERM DEBT 260,699 269,087
DEFERRED CREDITS AND OTHER LIABILITIES
Income taxes 113,600 113,399
Investment tax credits 4,195 6,790
Regulatory liability 27,372 26,338
Postretirement and other benefit
obligations 31,506 22,542
Other 18,048 11,919
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194,721 180,988
COMMON STOCK AND OTHER STOCKHOLDER'S EQUITY
Common stock, authorized 5,000,000 shares,
par value $20 per share, issued and
outstanding 3,626,510 shares 72,530 72,530
Capital in excess of par value 71,991 71,991
Retained earnings 361,158 305,765
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505,679 450,286
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$1,147,325 $1,078,910
========== ==========
See Accompanying Condensed Notes to Consolidated Financial Statements.
Form 10-Q Part I.
Item 1.
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CAROLINA TELEPHONE AND TELEGRAPH COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(Thousands of Dollars)
Three Months Ended Nine Months Ended
September 30, September 30,
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1994 1993 1994 1993
---- ---- ---- ----
(Unaudited) (Unaudited)
OPERATING REVENUES
Local service $ 71,727 $ 65,498 $207,716 $191,029
Network access 50,797 49,853 151,040 140,102
Long-distance network 27,476 26,253 84,930 76,351
Miscellaneous 34,998 21,932 91,110 68,092
-------- -------- -------- --------
184,998 163,536 534,796 475,574
OPERATING EXPENSES
Plant expense 51,983 46,368 151,365 142,492
Depreciation 30,427 28,714 90,760 85,483
Customer operations 25,794 22,610 72,173 65,015
Corporate operations 18,500 16,013 52,982 46,441
Merger and integration costs - - - 41,700
Other operating expenses 8,245 3,803 20,954 15,241
Taxes:
Federal income:
Current 10,195 11,937 36,517 29,676
Deferred 2,490 173 1,026 (13,285)
Deferred investment tax
credits (765) (1,004) (2,595) (3,167)
State, local and
miscellaneous 7,358 6,884 21,917 15,914
-------- -------- -------- --------
154,227 135,498 445,099 425,510
-------- -------- -------- --------
OPERATING INCOME 30,771 28,038 89,697 50,064
INTEREST CHARGES
Interest on long-term debt 5,010 4,341 14,543 14,105
Other interest 631 814 1,740 2,236
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5,641 5,155 16,283 16,341
OTHER INCOME (EXPENSE)
Interest charged to
construction 31 6 102 31
Other, net (597) 258 (172) 365
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(566) 264 (70) 396
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INCOME BEFORE EXTRAORDINARY ITEM 24,564 23,147 73,344 34,119
EXTRAORDINARY LOSSES ON EARLY
EXTINGUISHMENTS OF DEBT, NET - 952 - 2,318
-------- -------- -------- --------
NET INCOME $ 24,564 $ 22,195 $ 73,344 $ 31,801
======== ======== ======== ========
See Accompanying Condensed Notes to Consolidated Financial Statements.
Form 10-Q Part I.
Item 1.
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CAROLINA TELEPHONE AND TELEGRAPH COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Thousands of Dollars)
Nine Months Ended
September 30,
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1994 1993
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(Unaudited)
OPERATING ACTIVITIES
Net income $ 73,344 $ 31,801
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 90,760 85,483
Extraordinary losses on early extinguishments
of debt - 3,836
Deferred income taxes and investment
tax credits (496) (19,041)
Changes in operating assets and liabilities:
Receivables, net (17,046) (8,315)
Inventories (1,846) 1,212
Other current assets (3,267) 661
Accounts payable 17,591 6,280
Other current liabilities (21,842) 32,012
Noncurrent assets and liabilities, net 6,905 23,716
Other, net 3,020 (10,618)
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NET CASH PROVIDED BY OPERATING ACTIVITIES 147,123 147,027
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INVESTING ACTIVITIES
Additions to property, plant and equipment (123,825) (122,280)
Net cost from plant and equipment retired (1,840) (402)
Additions to investments (6,598) (3,656)
Increase in advances to parent company - (1,537)
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NET CASH USED BY INVESTING ACTIVITIES (132,263) (127,875)
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(Continued)
Form 10-Q Part I.
Item 1.
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CAROLINA TELEPHONE AND TELEGRAPH COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(Thousands of Dollars)
Nine Months Ended
September 30,
-----------------
1994 1993
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(Unaudited)
FINANCING ACTIVITIES
Proceeds from long-term borrowings $ - $ 150,000
Retirements of long-term debt (168) (131,215)
Increase (decrease) in commercial paper 3,300 (8,900)
Decrease in advances from parent company - (1,703)
Dividends paid (17,951) (26,474)
Other (41) (860)
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NET CASH USED BY FINANCING ACTIVITIES (14,860) (19,152)
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CHANGE IN CASH - -
CASH AT BEGINNING OF PERIOD 1 1
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CASH AT END OF PERIOD $ 1 $ 1
========= =========
See Accompanying Condensed Notes to Consolidated Financial Statements.
Form 10-Q Part I.
Item 1.
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CAROLINA TELEPHONE AND TELEGRAPH COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. ACCOUNTING POLICIES
The information contained in this Form 10-Q for the three- and nine-
month interim periods ended September 30, 1994 and 1993 has been prepared
in accordance with instructions to Form 10-Q and Rule 10-01 of Regulation
S-X. In the opinion of management, all adjustments considered necessary,
consisting only of normal recurring and certain nonrecurring accruals (see
Note 2), to present fairly the consolidated financial position, results of
operations, and cash flows for such interim periods have been made.
Certain information and footnote disclosures normally included in
consolidated financial statements prepared in accordance with generally
accepted accounting principles (GAAP) have been condensed or omitted. The
results of operations for the nine months ended September 30, 1994 are not
necessarily indicative of the operating results that may be expected for
the year ended December 31, 1994.
Basis of Presentation
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The accompanying consolidated financial statements include the
accounts of Carolina Telephone and Telegraph Company and its wholly-owned
subsidiary, Carolina Telephone Long Distance, Inc., collectively referred
to as the "Company". All significant intercompany transactions have been
eliminated.
Certain amounts previously reported for prior periods have been
reclassified to conform to the current period presentation in the
accompanying consolidated financial statements. Such reclassifications
had no effect on the results of operations as previously reported.
Earnings per Share
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Earnings per share information has been omitted because the Company
is a wholly-owned subsidiary of Sprint Corporation (Sprint).
2. SPRINT/CENTEL MERGER
Effective March 9, 1993, Sprint consummated its merger with Centel
Corporation (Centel), a telecommunications company with local exchange and
cellular/wireless communications services operations. Centel's local
exchange telephone businesses operate in six states: Florida, North
Carolina, Virginia, Illinois, Texas, and Nevada. The transaction costs
associated with the merger (consisting primarily of investment banking and
legal fees) and the estimated expenses of integrating and restructuring
the operations of the two companies (consisting primarily of employee
severance and relocation expenses and costs of eliminating duplicative
facilities) resulted in nonrecurring charges to Sprint during 1993.
Form 10-Q Part I.
Item 1.
-8-
CAROLINA TELEPHONE AND TELEGRAPH COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
2. SPRINT/CENTEL MERGER (continued)
The portion of such charges attributable to the Company was $46.4 million,
of which $41.7 million was recorded during the first nine months of 1993.
Such nonrecurring charges reduced net income for the first nine months of
1993 by approximately $25.3 million.
3. SUPPLEMENTAL CASH FLOW INFORMATION
The following are the supplemental cash flow disclosures for the nine
months ended September 30:
Cash Paid For: 1994 1993
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(Thousands of Dollars)
Interest (net of amounts
capitalized) $14,965 $13,886
Income taxes $45,055 $31,151
Form 10-Q Part I.
Item 2.
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CAROLINA TELEPHONE AND TELEGRAPH COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Liquidity and Capital Resources
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Cash flows from operating activities are the Company's primary source
of liquidity. Net cash provided by operating activities was fairly
consistent for the nine-month period ended September 30, 1994 compared
to the same period in 1993. Improved operating results were offset by
decreased other current liabilities and an increase in accounts receivable,
which was due primarily to increased operating revenues.
Net cash used by investing activities increased $4.4 million for the
nine-month period ended September 30, 1994 compared to the same period in
1993. This increase generally reflected a $1.5 million increase in
telecommunications plant additions, as well as a $2.9 million increase in
additions to cellular investments. The Company's planned construction
expenditures for 1994 are $143.1 million.
The primary source of financing for the Company has historically been
long-term debt. In addition, the Company periodically receives cash
advances from Sprint and issues commercial paper and notes payable to
banks. Net cash used by financing activities decreased $4.3 million for
the nine-month period ended September 30, 1994 compared to the same period
in 1993 primarily due to a reduction in dividend payments and an increase
in commercial paper, partially offset by the 1993 increase in long-term
debt.
As of September 30, 1994, the Company had a total of $60 million 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 withdrawn by the banks if there is a material
adverse change in the financial condition of Sprint or the Company. As of
September 30, 1994, no amounts had been borrowed against this credit
facility; however, $44.4 million of the bank line supports the commercial
paper outstanding at September 30, 1994.
The Company is also authorized to issue and sell an additional $75
million 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.
The Company's ratio of common equity to total capital was 61.7
percent at September 30, 1994 and 59.2 percent at December 31, 1993. The
Company's ratio of long-term debt to total capital was 32.9 percent at
September 30, 1994 and 35.4 percent at December 31, 1993. The Company's
ratio of short-term debt to total capital was 5.4 percent at September 30,
1994 and 5.4 percent at December 31, 1993.
Form 10-Q Part I.
Item 2.
-10-
CAROLINA TELEPHONE AND TELEGRAPH COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Operating Results
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Local service revenues increased $16.7 million or 8.7 percent for the
nine-month period ended September 30, 1994 compared to the same period in
1993. Basic area service revenues contributed $6.7 million, primarily due
to a 5.7 percent growth in access lines. For the same period, custom
calling, telephone instrument leases, service connections, and touch tone
features added $9.1 million as a result of access line gains and increased
marketing promotions.
Network access revenues increased $10.9 million or 7.8 percent for
the nine-month period ended September 30, 1994 compared to the same period
in 1993. The increase was primarily due to an 11.5 percent growth in
intrastate access minutes and a 7.9 percent growth in interstate access
minutes.
Long distance network revenues increased $8.6 million or 11.2 percent
for the nine-month period ended September 30, 1994 compared to the same
period in 1993. The increase was primarily due to a change in intrastate
intralata settlement methodologies in North Carolina effective January 1,
1994. Effective January 1, 1994, toll revenues are settled under an
originating responsibility plan rather than a pool arrangement.
Miscellaneous revenues increased $23.0 million or 33.8 percent for
the nine-month period ended September 30, 1994 compared to the same period
in 1993. Rent revenues increased $8.6 million, primarily due to the
leasing of the Company's building and other assets to a recently-formed
affiliated service company which provides services to the Company and four
of its affiliates. North Carolina Utility Services (NCUS), a nonregulated
business venture specializing in locating underground utility lines,
contributed $7.4 million due to the expansion of the service area and an
increase in the customer base in existing service areas. The increase in
miscellaneous revenues was also due to an increase of $8.5 million in
equipment sales revenues.
Plant expenses increased $8.9 million or 6.2 percent for the nine-
month period ended September 30, 1994 compared to the same period in 1993.
The land and building rent expense increased $4.2 million, primarily due to
the Company's expenses for the use of a portion of the service company's
leased land and buildings. The generic software expense increased due to
upgrades of digital switches to provide enhanced services. The network
administration expense increased due primarily to the conversion and
integration of two systems for a modernized customer facilities database.
Form 10-Q Part I.
Item 2.
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CAROLINA TELEPHONE AND TELEGRAPH COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Operating Results (continued)
- - -----------------------------
Customer operations expenses increased $7.2 million or 11.0 percent
for the nine-month period ended September 30, 1994 compared to the same
period in 1993. As a result of continued expansions of its customer base,
NCUS experienced an increase in expenses of $6.3 million.
Corporate operations expenses increased $6.5 million or 14.1 percent
for the nine-month period ended September 30, 1994 compared to the same
period in 1993. An increase in the information management network
operations expense of $2.0 million was primarily due to the increased
needs for programming, data applications, and development of software for
mainframes and personal computers to support the consolidation of the
administrative functions of the Company and four affiliated companies
within the service company. Also contributing to the increase were costs
related to the implementation of a mechanized system for outside plant
records and an increase in employee benefit expenses.
Other operating expenses increased $5.7 million or 37.5 percent for
the nine-month period ended September 30, 1994 compared to the same period
in 1993. This fluctuation was due primarily to a $7.3 million increase in
cost of equipment sales, generally corresponding with the overall trend in
equipment sales. This increase was partially offset by improved operating
results associated with nonregulated activities.
Sprint/Centel Merger
- - --------------------
Effective March 9, 1993, Sprint consummated its merger with Centel, a
telecommunications company with local exchange and cellular/wireless
communications services operations. Centel's local exchange telephone
businesses operate in six states: Florida, North Carolina, Virginia,
Illinois, Texas, and Nevada. The transaction costs associated with the
merger (consisting primarily of investment banking and legal fees) and the
estimated expenses of integrating and restructuring the operations of the
two companies (consisting primarily of employee severance and relocation
expenses and costs of eliminating duplicative facilities) resulted in
nonrecurring charges to Sprint during 1993. The portion of such charges
attributable to the Company was $46.4 million, of which $41.7 million was
recorded during the first nine months of 1993. Such nonrecurring charges
reduced net income for the first nine months of 1993 by approximately
$25.3 million.
Form 10-Q Part I.
Item 2.
-12-
CAROLINA TELEPHONE AND TELEGRAPH COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Other Matters
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Consistent with most local exchange carriers, the Company accounts
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." The application of SFAS No. 71 requires the
accounting recognition of the rate actions of regulators where appropriate,
including the recognition of depreciation based on estimated useful lives
prescribed by regulatory commissions rather than those which might be
utilized by non-regulated enterprises. The Company currently believes
that its operations meet the criteria for the continued application of the
provisions of SFAS No. 71. However, the Company operates in an evolving
environmnent in which the regulatory framework is changing and the level
of competitiion is increasing. Accordingly, the Company constantly
monitors and evaluates the ongoing applicability of SFAS No. 71 by
assessing the likelihood that prices which provide for the recovery of
specific costs can continue to be charged to customers. In the event the
Company determines that its operations no longer qualify for the
application of the provisions of SFAS No. 71, the Company would eliminate
from its financial statements the effects of any actions of regulators
that had been recognized as assets and liabilities, resulting in the
recognition of a material, extraordinary, non-cash charge, the amount of
which is not known at the present time.
Form 10-Q Part II.
-13-
CAROLINA TELEPHONE AND TELEGRAPH COMPANY
OTHER INFORMATION
Item 1. Legal Proceedings
There were no reportable events during the quarter ended
September 30, 1994.
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
The Company's ratios of earnings to fixed charges were
7.62 and 7.51 for the three months ended and 7.77 and 3.87
for the nine months ended September 30, 1994 and 1993, respec-
tively. These ratios have been computed by dividing fixed
charges into the sum of (a) income before extraordinary
item less capitalized interest included in income, (b) in-
come taxes, and (c) fixed charges. Fixed charges consist of
interest on all indebtedness (including amortization of debt
issuance expenses) and the interest factor of operating rents.
In the absence of the nonrecurring merger and integration
costs of $41.7 million recorded during the first quarter of
1993, the ratio of earnings to fixed charges would have been
6.18 for the nine months ended September 30, 1993.
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibit is filed as part of this report:
(12) Computation of ratios of earnings to fixed charges.
(b) No reports on Form 8-K were filed during the quarter
ended September 30, 1994.
Form 10-Q Part II.
-14-
CAROLINA TELEPHONE AND TELEGRAPH COMPANY
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
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Registrant
Date 11-14-94 By s/F. E. Westmeyer
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F. E. Westmeyer, Vice President-Finance
(Principal Financial Officer)
Date 11-14-94 By s/T. J. Geller
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T. J. Geller, Controller
(Principal Accounting Officer)