UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended December 31, 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 (IRS Employer
incorporation or organization) Identification No.)
14111 Capital Blvd, Wake Forest, NC 27587
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (919) 554-7900
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Securities subject to Section 15(d) of the Act:
Title of each class
Debentures
5 3/4% due August 15, 2000 6 1/8% due May 1, 2003
7 1/4% due December 15, 2004 6 3/4% due August 15, 2013
This registrant meets the conditions set forth in General Instruction I(1)(a)
and (b) of Form 10-K and is therefore filing this form with the reduced
disclosure format.
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
There is no voting stock held by non-affiliates.
There were 3,626,510 common shares outstanding at December 31, 1997, and at the
date of filing of this report.
CAROLINA TELEPHONE AND TELEGRAPH COMPANY
SECURITIES AND EXCHANGE COMMISSION
ANNUAL REPORT ON FORM 10-K
Part I
Item 1. Business
Carolina Telephone and Telegraph Company (CT&T), a wholly-owned subsidiary of
Sprint Corporation, was incorporated under the laws of the State of North
Carolina in 1968. In 1969, CT&T acquired all of the public utility assets of the
predecessor company of the same name under a plan of merger.
CT&T provides local exchange services in all or part of 50 counties, mainly in
the eastern portion of North Carolina. These services include access by
telephone customers and other carriers to CT&T's local exchange facilities,
sales of telecommunications equipment, and long distance services within
specified geographical areas, or local access transport areas (LATAs).
CT&T is subject to the jurisdiction of the Federal Communications Commission
(FCC) and the North Carolina Utilities Commission (NCUC).
The following table reflects major revenue categories as a percentage of CT&T's
total net operating revenues:
1997 1996 1995
- -------------------------------------------------------------- ---------------- ----------------- ----------------
Local service 46.1% 42.4% 39.5%
Network access 27.5 28.5 28.6
Toll service 4.2 7.3 12.4
Other 22.2 21.8 19.5
- -------------------------------------------------------------- ---------------- ----------------- ----------------
100.0% 100.0% 100.0%
---------------- ----------------- ----------------
The following table summarizes access lines in service at the end of each of the
last three years:
1997 1996 1995
- -------------------------------------------------------------- ---------------- ----------------- ----------------
(in thousands)
Access lines
Residential 816 792 764
Business 276 251 228
- -------------------------------------------------------------- ---------------- ----------------- ----------------
Total 1,092 1,043 992
---------------- ----------------- ----------------
Growth rates 4.6% 5.2%
---------------- -----------------
AT&T is CT&T's largest customer for network access services. In 1997 and 1996,
12% of CT&T's net operating revenues was derived from services (mainly network
access services) provided to AT&T, compared with 14% in 1995. While AT&T is a
significant customer, CT&T does not believe revenues are dependent on AT&T, as
customers' demand for interLATA long distance telephone service is not tied to
any one long distance carrier.
CT&T had approximately 3,700 employees at year-end 1997, of which 58% were
represented by the Communications Workers of America or the International
Brotherhood of Electrical Workers for collective bargaining purposes.
In 1987, CT&T formed Carolina Telephone Long Distance, Inc. (CTLD). CTLD resold
interexchange long distance services from exchanges within CT&T's service area.
Through early 1997, CT&T phased out these reseller services.
In September 1996, Sprint contributed NOCUTS, Inc. (formerly called Joint
Underground Locating Services, Inc.)(NOCUTS) to CT&T. NOCUTS was previously
owned by The United Telephone Company of Pennsylvania, an affiliate of CT&T.
NOCUTS operates a non-regulated line of business specializing in locating
underground utility lines.
In July 1995, legislation was enacted that allowed incumbent local exchange
telephone companies to have intrastate rates, terms and conditions for services
determined based on a price cap form of regulation. The NCUC approved a price
regulation plan for CT&T effective in June 1996. The price regulation allows
CT&T to adjust prices for basic, interconnection and non-basic services, using
an inflation-based formula. As a consumer safeguard, CT&T capped residential
rates at its June 1996 level for the first three years of the plan.
The extent and ultimate impact of competition will continue to depend, to a
considerable degree, on FCC and state regulatory actions, court decisions and
possible federal and state legislation. Federal legislation designed to
stimulate competition was passed and signed into law in February 1996. See Part
II, Item 7 "Management's Discussion and Analysis of Financial Condition and
Results of Operations" for a discussion of this law.
CT&T's environmental compliance and remediation expenditures are mainly related
to the operation of standby power generators. The expenditures arise in
connection with standards compliance, permits, or occasional remediation, which
may be related to generators, batteries or fuel storage. CT&T's expenditures
relating to environmental compliance and remediation have not been material to
its financial statements or its operations and are not expected to have any
future material effects.
Item 2. Properties
CT&T's properties consist mainly of land, structures, facilities and equipment.
The following table summarizes CT&T's major telephone assets as a percentage of
total property, plant and equipment at year-end 1997:
Property, plant and equipment
Cable and wire facilities 42.8%
Central office equipment 41.8
General support assets 12.8
Other 2.6
- ---------------------------------------------------------------- ------------
100.0%
------------
Item 3. Legal Proceedings
No material legal proceedings are pending against CT&T or its subsidiaries.
Item 4. Submission of Matters to a Vote of Security Holders
Omitted under the provisions of General Instruction I.
Part II
Item 5. Market for Registrant's Common Stock and Related Shareholder Matters
CT&T is a wholly-owned subsidiary of Sprint Corporation; consequently, its
common stock is not traded.
Item 6. Selected Financial Data
Omitted under the provisions of General Instruction I.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
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 and latitude allowed its competitors by
the Federal Communications Commission (FCC) or the 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 changes 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
The Telecom Act, which was signed into law in February 1996, was designed to
promote competition in all aspects of telecommunications. It eliminated legal
and regulatory barriers to entry into local telephone markets. It also required
incumbent local exchange carriers (LECs), among other things, to allow local
resale at wholesale rates, negotiate interconnection agreements, provide
nondiscriminatory access to unbundled network elements and allow collocation of
interconnection equipment by competitors. The Telecom Act also allows Bell
Operating Companies to provide in-region long distance service once they obtain
state certification of compliance with a competitive "checklist," have a
facilities-based competitor, and obtain an FCC ruling that the provision of
in-region long distance service is in the public interest. The Telecom Act's
impact on CT&T remains unclear because the rules for competition are still being
decided by regulators and the courts. Local competition is expected to
eventually result in some loss of CT&T's market share.
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
LECs and state public utility commissions 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 1997, the court struck down the FCC's pricing rules. It ruled that the
Telecom Act left jurisdiction over pricing matters to the states. The court also
struck down certain other FCC rules on jurisdictional or substantive grounds.
The U.S. Supreme Court has agreed to review the appeals court decision. In 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. All
carriers providing telecommunications services will be required to
fund this program, which is capped at $2.7 billion per year. However,
LECs can pass their portion of these costs on to long distance
carriers.
- Per-minute interstate access rates charged by LECs will decline over
time to become cost-based, beginning in 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.
- 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.
Results of Operations
- ------------------------------------------------------------------------------- --- ------------- -- -------------
Years ended December 31, 1997 1996
- ------------------------------------------------------------------------------- --- ------------- -- -------------
(in thousands)
Net Operating Revenues
Local service $ 388,050 $ 351,218
Network access 231,349 235,642
Toll service 35,287 60,192
Other 187,464 181,066
- ------------------------------------------------------------------------------- --- ------------- -- -------------
Net operating revenues 842,150 828,118
- ------------------------------------------------------------------------------- --- ------------- -- -------------
Operating Expenses
Costs of services and products 329,875 345,967
Selling, general and administrative 164,561 152,067
Depreciation and amortization 140,338 135,205
- ------------------------------------------------------------------------------- --- ------------- -- -------------
Total operating expenses 634,774 633,239
- ------------------------------------------------------------------------------- --- ------------- -- -------------
Operating Income $ 207,376 $ 194,879
--- ------------- -- -------------
Net Operating Revenues
Net operating revenues increased 2% in 1997 mainly because of customer access
line growth of 4.6%.
Local service revenues, derived from providing local exchange services,
increased 10% in 1997. This increase is mainly due to the access line growth,
which reflects strong economic growth in CT&T's service areas and increases in
second-line service for existing business and residential customers to meet
their lifestyle and data access needs. Local service revenues also increased
because of extended area calling plans and increased demand for advanced
intelligent network services, such as Caller ID and Call Waiting. In addition,
revenues reflect increased wire maintenance agreements.
Network access service revenues, derived from interexchange long distance
carriers' use of the local network to complete calls, decreased 2% in 1997. This
overall decrease is mainly due to FCC-mandated access rate reductions effective
in July 1997 -- see "Regulatory Developments" for more information. Minutes of
use increased 5%, partly offsetting this decrease.
Toll service revenues are mainly derived from providing long distance services
within specified geographical areas, or local access transport areas (LATAs).
These revenues decreased 41% in 1997 mainly because reseller interexchange long
distance services were phased out through early 1997, and because of extended
local area calling plans. This decline was partly offset by the related
increase in local service revenues.
Other revenues are mainly derived from telecommunications equipment sales,
directory sales and listing services, and billing and collection services. Other
revenues increased 4% in 1997 mainly because of increased sales of telephone
equipment. Partly offsetting the increase was a decrease in revenues related to
the change in transfer pricing for certain transactions between CT&T and
Sprint's directory publishing division beginning in July 1997 to more accurately
reflect market pricing.
Operating Expenses
Costs of services and products decreased 5% in 1997 mainly because of the phase
out of the interexchange long distance reseller services through early 1997.
This decline was partly offset by customer line access growth and increased
equipment sales. Cost of services and products were 39.2% of net operating
revenues in 1997 and 41.8% in 1996.
Selling, general and administrative expense increased 8% in 1997 because of
expanded operations of locating underground utility lines and increased
marketing costs to promote products and services.
Depreciation increased 4% in 1997 mainly because of plant additions.
Extraordinary Items
CT&T incurred after-tax extraordinary charges of $4 million related to the early
extinguishment of debt in 1996.
Year 2000 Issue
The "Year 2000" issue affects installed computer systems, network elements,
software applications, and other business systems that have time-sensitive
programs that may not properly reflect or recognize the year 2000. Because many
computers and computer applications define dates by the last two digits of the
year, "00" may not be properly identified as the year 2000. This error could
result in miscalculations or system failures.
Sprint Corporation, with its subsidiaries, (Sprint) started a program in 1996 to
identify and address the Year 2000 issue. It is taking an inventory of its
network and computer systems and is creating and implementing plans to make them
Year 2000 compliant. Sprint is using both internal and external sources to
identify, correct or reprogram, and test its systems for Year 2000 compliance.
The total cost of modifications and conversions is not known at this time;
however, it is not expected to be material to CT&T's financial position, results
of operations or cash flows and is being expensed as incurred.
The Year 2000 issue may also affect the systems and applications of Sprint's
customers, vendors or resellers. Sprint is also contacting others with whom it
conducts business to receive the appropriate warranties and assurances that
those third parties are, or will be, Year 2000 compliant.
If compliance is not achieved in a timely manner, the Year 2000 issue could have
a material effect on Sprint's operations. However, Sprint is focusing on
identifying and addressing all aspects of its operations that may be affected by
the Year 2000 issue and is addressing the most critical applications first. As a
result, Sprint management does not believe its operations, or the operations of
its subsidiaries, will be materially adversely affected.
Impact of Recently Issued Accounting Pronouncement
See Note 9 of Notes to Consolidated Financial Statements for a discussion of a
recently issued accounting pronouncement.
Item 8. Financial Statements and Supplementary Data Index
Page Reference
------------------------
Report of Independent Auditors 8
Consolidated Statements of Income for each of the three years ended December 31,
1997 9
Consolidated Balance Sheets as of December 31, 1997 and 1996 10
Consolidated Statements of Cash Flows for each of the three years ended December
31, 1997 11
Consolidated Statements of Changes in Shareholder's Equity for each of the three
years ended December 31, 1997 12
Notes to Consolidated Financial Statements 13
Schedule II - Consolidated Valuation and Qualifying Accounts for each of the
three years ended December 31, 1997 23
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Carolina Telephone and Telegraph Company
We have audited the accompanying consolidated balance sheets of Carolina
Telephone and Telegraph Company (CT&T), a wholly-owned subsidiary of Sprint
Corporation, as of December 31, 1997 and 1996, and the related consolidated
statements of income, cash flows and changes in shareholder's equity for each of
the three years in the period ended December 31, 1997. Our audits also included
the financial statement schedule listed in the Financial Statements and
Supplementary Data Index. These financial statements and the schedule are the
responsibility of the CT&T's management. Our responsibility is to express an
opinion on these financial statements and the schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of CT&T at
December 31, 1997 and 1996, and the consolidated results of its operations and
its cash flows for each of the three years in the period ended December 31,
1997, in conformity with generally accepted accounting principles. Also, in our
opinion, the related financial statement schedule, when considered in relation
to the basic financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
As discussed in Note 7 to the consolidated financial statements, CT&T
discontinued accounting for its operations in accordance with Statement of
Financial Accounting Standards No. 71, "Accounting for the Effects of Certain
Types of Regulation," in 1995.
ERNST & YOUNG LLP
Kansas City, Missouri
January 21, 1998
8
CONSOLIDATED STATEMENTS OF INCOME Carolina Telephone and Telegraph Company
- ---------------------------------------------------- -- ----------------- -- ----------------- -- -----------------
Years Ended December 31, 1997 1996 1995
- ---------------------------------------------------- -- ----------------- -- ----------------- -- -----------------
(in thousands)
Net Operating Revenues $ 842,150 $ 828,118 $ 764,619
Operating Expenses
Costs of services and products 329,875 345,967 314,072
Selling, general and administrative 164,561 152,067 138,069
Depreciation and amortization 140,338 135,205 132,146
Restructuring costs - - 8,079
- ---------------------------------------------------- -- ----------------- -- ----------------- -- -----------------
Total operating expenses 634,774 633,239 592,366
- ---------------------------------------------------- -- ----------------- -- ----------------- -- -----------------
Operating Income 207,376 194,879 172,253
Interest expense (22,329) (21,262) (22,413)
Other income, net 14,592 14,668 8,602
- ---------------------------------------------------- -- ----------------- -- ----------------- -- -----------------
Income before income taxes and extraordinary items
199,639 188,285 158,442
Income taxes (73,905) (70,107) (58,510)
- ---------------------------------------------------- -- ----------------- -- ----------------- -- -----------------
Income before extraordinary items 125,734 118,178 99,932
Extraordinary items, net - (4,085) (42,424)
- ---------------------------------------------------- -- ----------------- -- ----------------- -- -----------------
Net Income $ 125,734 $ 114,093 $ 57,508
-- ----------------- -- ----------------- -- -----------------
See accompanying Notes to Consolidated Financial Statements.
9
CONSOLIDATED BALANCE SHEETS Carolina Telephone and Telegraph Company
- ----------------------------------------------------------------- --- ------------------- --- ------------------
December 31, 1997 1996
- ----------------------------------------------------------------- --- ------------------- --- ------------------
(in thousands, except per share data)
Assets
Current assets
Cash $ 104 $ 414
Receivables
Customers and other, net of allowance of $4,818 and
$3,506 123,029 107,193
Interexchange carriers 22,107 23,174
Affiliated companies 29,045 8,847
Inventories 11,295 9,118
Other 5,531 5,011
- ----------------------------------------------------------------- --- ------------------- --- ------------------
Total current assets 191,111 153,757
Property, plant and equipment 2,055,464 1,939,608
Less accumulated depreciation 1,158,542 1,062,982
- ----------------------------------------------------------------- --- ------------------- --- ------------------
Net property, plant and equipment 896,922 876,626
Prepaid pension 61,779 51,991
Deferred charges and other assets 36,953 35,670
- ----------------------------------------------------------------- --- ------------------- --- ------------------
Total $ 1,186,765 $ 1,118,044
--- ------------------- --- ------------------
Liabilities and Shareholder's Equity
Current liabilities
Outstanding checks in excess of cash balances $ 16,694 $ 2,956
Advances from parent 152,393 137,002
Current maturities of long-term debt 6 842
Accounts payable
Vendors and other 15,682 17,993
Interexchange carriers 20,366 18,911
Affiliated companies 26,479 18,902
Advance billings and customer deposits 17,376 16,869
Other 19,411 31,006
- ----------------------------------------------------------------- --- ------------------- --- ------------------
Total current liabilities 268,407 244,481
Long-term debt 198,813 198,631
Deferred credits and other liabilities
Deferred income taxes and investment tax credits 98,064 89,513
Postretirement and other benefit obligations 73,413 62,740
Other 1,702 7,939
- ----------------------------------------------------------------- --- ------------------- --- ------------------
Total deferred credits and other liabilities 173,179 160,192
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 398,092 366,466
- ----------------------------------------------------------------- --- ------------------- --- ------------------
Total shareholder's equity 546,366 514,740
- ----------------------------------------------------------------- --- ------------------- --- ------------------
Total $ 1,186,765 $ 1,118,044
--- ------------------- --- ------------------
See accompanying Notes to Consolidated Financial Statements.
10
CONSOLIDATED STATEMENTS OF CASH FLOWS Carolina Telephone and Telegraph Company
- ----------------------------------------------------------------- ----------------- ---------------- -----------------
Years Ended December 31, 1997 1996 1995
- ----------------------------------------------------------------- ----------------- ---------------- -----------------
(in thousands)
Operating Activities
Net income $ 125,734 $ 114,093 $ 57,508
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 140,338 135,205 132,146
Deferred income taxes and investment tax credits 6,767 9,005 (8,738)
Extraordinary losses, net - 4,085 42,424
Changes in assets and liabilities
Receivables, net (34,967) (26,629) 1,471
Inventories and other current assets (2,405) (1,679) 8,101
Accounts payable, accrued expenses and other current
liabilities 9,371 (11,056) (11,608)
Other assets and liabilities, net (5,143) (2,184) 16,797
- ----------------------------------------------------------------- --- ------------- -- ------------- --- -------------
Net cash provided by operating activities 239,695 220,840 238,101
- ----------------------------------------------------------------- --- ------------- -- ------------- --- -------------
Investing Activities
Capital expenditures (158,000) (158,586) (146,146)
Other, net (2,634) (4,143) (5,527)
- ----------------------------------------------------------------- --- ------------- -- ------------- --- -------------
Net cash used by investing activities (160,634) (162,729) (151,673)
- ----------------------------------------------------------------- --- ------------- -- ------------- --- -------------
Financing Activities
Payments on long-term debt (654) (61,508) (8,569)
Net increase (decrease) in short-term borrowings - (42,800) 9,200
Net increase (decrease) in advances from parent 15,391 136,930 (2,738)
Dividends paid (94,108) (90,373) (84,283)
- ----------------------------------------------------------------- --- ------------- -- ------------- --- -------------
Net cash used by financing activities (79,371) (57,751) (86,390)
- ----------------------------------------------------------------- --- ------------- -- ------------- --- -------------
Increase (Decrease) in Cash and Equivalents (310) 360 38
Cash and Equivalents at Beginning of Year 414 54 16
- ----------------------------------------------------------------- --- ------------- -- ------------- --- -------------
Cash and Equivalents at End of Year $ 104 $ 414 $ 54
--- ------------- -- ------------- --- -------------
Supplemental Cash Flow Information
Cash paid for interest, net of amounts capitalized $ 22,062 $ 22,046 $ 22,994
Cash paid for income taxes $ 61,746 $ 66,498 $ 70,714
Noncash Activities
Exchange of investment in affiliated partnership for
investment in affiliated preferred stock $ - $ - $ 29,043
See accompanying Notes to Consolidated Financial Statements.
11
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDER'S EQUITY Carolina Telephone and Telegraph Company
- ------------------------------------------------------------------------------------------------------------------
Capital in
Common stock excess of Retained
par value earnings Total
- -------------------------------------------- --- ------------- -- ------------- --- ------------- -- -------------
(in thousands)
Beginning 1995 balance $ 72,530 $ 71,991 $ 369,521 $ 514,042
Net income - - 57,508 57,508
Dividends declared - - (84,283) (84,283)
- -------------------------------------------- --- ------------- -- ------------- --- ------------- -- -------------
Ending 1995 balance 72,530 71,991 342,746 487,267
Net income - - 114,093 114,093
Dividends declared - - (90,373) (90,373)
Contribution of NOCUTS - 3,753 - 3,753
- -------------------------------------------- --- ------------- -- ------------- --- ------------- -- -------------
Ending 1996 balance 72,530 75,744 366,466 514,740
Net income - - 125,734 125,734
Dividends declared - - (94,108) (94,108)
- -------------------------------------------- --- ------------- -- ------------- --- ------------- -- -------------
Ending 1997 balance $ 72,530 $ 75,744 $ 398,092 $ 546,366
--- ------------- -- ------------- --- ------------- -- -------------
See accompanying Notes to Consolidated Financial Statements.
12
NOTES TO CONSOLIDATED FINANCIAL Carolina Telephone and Telegraph Company
STATEMENTS
1. Summary of Significant Accounting Policies
Basis of Consolidation and Presentation
The consolidated financial statements include the accounts of Carolina Telephone
and Telegraph Company and its wholly-owned subsidiaries (CT&T), Carolina
Telephone Long Distance, Inc., SC One Company, and NOCUTS, Inc. (formerly Joint
Underground Locating Services, Inc.) (NOCUTS). All significant intercompany
transactions have been eliminated. CT&T is a wholly-owned subsidiary of Sprint
Corporation; accordingly, earnings per share information has been omitted.
The consolidated financial statements are prepared according to generally
accepted accounting principles. These principles require 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-year
presentation. These reclassifications had no effect on the results of operations
or shareholder's equity as previously reported.
At year-end 1995, CT&T adopted accounting principles for a competitive
marketplace and discontinued accounting fo the economic effects of regulation
under Statement of Financial Accounting Standards (SFAS) No. 71, "Accounting for
the Effects of Certain Types of Regulation" (see Note 7).
Operations
CT&T provides local exchange services, access by telephone customers and other
carriers to local exchange facilities, sales of telecommunications equipment and
long distance services within specified geographical areas in North Carolina.
In September 1996, Sprint contributed NOCUTS to CT&T. NOCUTS was previously
owned by The United Telephone Company of Pennsylvania, an affiliate of CT&T.
Although the contribution resulted in a change in reporting entity, prior years'
financial statements have not been restated because the impact on CT&T's
financial position and operations was not significant. NOCUTS operates a
non-regulated line of business specializing in locating underground utility
lines.
Revenue Recognition
CT&T recognizes operating revenues as services are rendered or as products are
delivered to customers. Operating revenues are recorded net of an estimate for
uncollectible accounts.
Cash and Equivalents
CT&T uses controlled disbursement banking arrangements as part of its cash
management program. Outstanding checks in excess of cash balances are reflected
as a current liability on the consolidated balance sheets. CT&T had sufficient
funds available to fund these outstanding checks when they were presented for
payment.
13
1. Summary of Significant Accounting Policies (continued)
Inventories
Inventories consist of materials and supplies (stated at average cost) and
equipment held for resale (stated at the lower of average cost or market).
Property, Plant and Equipment
Property, plant and equipment is recorded at cost. Generally, ordinary asset
retirements and disposals are charged against accumulated depreciation with no
gain or loss recognized. Repairs and maintenance costs are expensed as incurred.
Depreciation
The cost of property, plant and equipment is generally depreciated on a
straight-line basis over estimated economic useful lives. Prior to the
discontinued use of SFAS 71 at year-end 1995, the cost of property, plant and
equipment had been generally depreciated on a straight-line basis over the lives
prescribed by regulatory commissions.
Income Taxes
CT&T's operations are included in the consolidated federal income tax return of
Sprint Corporation and its subsidiaries (Sprint). Federal income tax is
calculated by CT&T on the basis of its filing a separate return.
Investment tax credits (ITC) related to regulated telephone property, plant and
equipment have been deferred and are being amortized over the estimated useful
lives of the related assets.
2. Employee Benefit Plans
Defined Benefit Pension Plan
Substantially all CT&T employees are covered by a noncontributory defined
benefit pension plan sponsored by Sprint. Benefits for plan participants
represented by collective bargaining units are based on negotiated schedules of
defined amounts. For participants not covered by collective bargaining
agreements, the plan provides pension benefits based on years of service and
participants' compensation.
CT&T's policy is to make annual plan contributions equal to an actuarially
determined amount consistent with applicable federal tax regulations. The
funding objective is to accumulate funds at a relatively stable rate over the
participants' working lives so that benefits are fully funded at retirement. At
year-end 1997, the plan's assets consisted mainly of investments in corporate
equity securities and U.S. government and corporate debt securities.
Pension costs or credits are determined for each Sprint subsidiary based on a
calculation of service costs and projected benefit obligations, and an
appropriate allocation of unrecognized prior service costs, transition asset and
plan assets. Net periodic pension credits recorded by CT&T were $8 million in
1997 and $7 million in 1996 and 1995.
14
2. Employee Benefit Plans (continued)
Defined Contribution Plans
Sprint sponsors defined contribution employee savings plans covering
substantially all CT&T employees. Participants may contribute portions of their
pay to the plans. For employees represented by collective bargaining units, CT&T
matches contributions based on negotiated amounts. CT&T also matches
contributions of employees not covered by collective bargaining agreements. For
those participants, their contributions are matched in Sprint common stock. The
matching is equal to 50% of participants' contributions up to 6% of their pay.
In addition, Sprint may, at the discretion of its Board of Directors, provide
matching contributions based on the performance of Sprint common stock compared
to other telecommunications companies' stock. CT&T's matching contributions were
$4 million in 1997, 1996 and 1995.
Postretirement Benefits
Sprint provides postretirement benefits (principally medical benefits) to
substantially all employees. Employees retiring before certain dates are
eligible for benefits at no cost, or at a reduced cost. Employees retiring after
certain dates are eligible for benefits on a shared-cost basis. CT&T funds the
accrued costs as benefits are paid.
Net postretirement benefit costs are determined for each Sprint subsidiary based
on a calculation of service costs and accumulated postretirement benefit
obligations and an appropriate allocation of unrecognized prior service costs,
unrecognized net gains and transition obligation. CT&T recorded net
postretirement benefit costs of $15 million in 1997 and 1996, and $17 million in
1995.
3. Income Taxes
Income tax expense on income before extraordinary items consisted of the
following:
1997 1996 1995
- -------------------------------------------------------------- -- ------------- --- ------------- -- -------------
(in thousands)
Current income tax expense
Federal $ 54,849 $ 49,780 $ 54,744
State 12,289 11,322 12,504
- -------------------------------------------------------------- -- ------------- --- ------------- -- -------------
Total current 67,138 61,102 67,248
- -------------------------------------------------------------- -- ------------- --- ------------- -- -------------
Deferred income tax expense (benefit)
Federal 5,686 7,234 (5,777)
State 1,081 1,771 (1,023)
Amortization of deferred ITC - - (1,938)
- -------------------------------------------------------------- -- ------------- --- ------------- -- -------------
Total deferred 6,767 9,005 (8,738)
- -------------------------------------------------------------- -- ------------- --- ------------- -- -------------
Total income tax expense $ 73,905 $ 70,107 $ 58,510
-- ------------- --- ------------- -- -------------
15
3. Income Taxes (continued)
The differences that caused the effective income tax rate to vary from the
statutory rate of 35% were as follows:
1997 1996 1995
- -------------------------------------------------------------- -- ------------- --- ------------- -- ------------
(in thousands)
Income tax expense at the statutory rate $ 69,874 $ 65,900 $ 55,455
Less ITC included in income - - 1,938
- -------------------------------------------------------------- -- ------------- -- -------------- -- ------------
Expected federal income tax provision after ITC 69,874 65,900 53,517
Effect of
State income tax, net of federal income tax effect 8,688 8,510 7,463
Other, net (4,657) (4,303) (2,470)
- -------------------------------------------------------------- -- ------------- -- -------------- -- ------------
Income tax expense, including ITC $ 73,905 $ 70,107 $ 58,510
-- ------------- -- -------------- -- ------------
Effective income tax rate 37.0% 37.2% 36.9%
-- ------------- -- -------------- -- ------------
In 1996, CT&T redeemed outstanding debt prior to maturity, resulting in an
after-tax extraordinary loss of $4 million, net of income tax benefits of $3
million. At year-end 1995, CT&T adopted accounting principles for a competitive
marketplace and discontinued applying SFAS 71 to its financial statements. This
resulted in an after-tax, noncash extraordinary charge of $42 million, net of
income tax benefits of $52 million (see Note 7).
CT&T recognizes deferred income taxes for the temporary differences between the
carrying amounts of its assets and liabilities for financial statement purposes
and their tax bases. The sources of the differences that give rise to the
deferred income tax assets and liabilities at year-end 1997 and 1996, along with
the income tax effect of each, were as follows:
1997 Deferred Income Tax 1996 Deferred Income Tax
------------- -- ------------- --- ------------- -- -------------
Assets Liabilities Assets Liabilities
- -------------------------------------------- --- ------------- -- ------------- --- ------------- -- -------------
(in thousands)
Property, plant and equipment $ - $ 105,656 $ - $ 96,081
Postretirement and other benefits 29,277 - 21,227 -
Prepaid pension costs - 24,637 - 19,998
Other, net 7,232 - 9,327 -
- -------------------------------------------- --- ------------- -- ------------- -- ------------- -- -------------
Total $ 36,509 $ 130,293 $ 30,554 $ 116,079
--- ------------- -- ------------- -- ------------- -- -------------
16
4. Borrowings
Long-term Debt
Long-term debt at year-end was as follows:
Interest Rates 1997 1996
- ----------------------------------------------------- ------------------------- --- ------------- -- -------------
(in thousands)
Debentures, maturities
1997 - $ - $ 825
2000 5.8% 50,000 50,000
2003 - 2007 6.1% - 7.3% 100,000 100,000
2013 6.8% 50,000 50,000
Other 7.3% - 8.4% 6 22
Unamortized debt discount (1,187) (1,374)
- ----------------------------------------------------- ------------------------- -- ------------- -- -------------
198,819 199,473
Less current maturities 6 842
- ----------------------------------------------------- ------------------------- -- ------------- -- -------------
Long-term debt $ 198,813 $ 198,631
-- ------------- -- -------------
Long-term debt maturities during the next five years consist of $6,000 in 1998
and $50 million in 2000.
At year-end 1997, CT&T had lines of credit with banks totaling $31 million. No
borrowings were outstanding. The bank lines provide for short-term borrowings at
market rates of interest and require annual commitment fees. The lines of credit
will expire in April 1998.
CT&T's 1997 short-term financing was provided by Sprint. The weighted average
interest rates on short-term borrowings were 5.1% in 1997, 5.5% in 1996 and 5.9%
in 1995.
CT&T was in compliance with all restrictive or financial covenants relating to
its debt arrangements at year-end 1997.
During 1996, CT&T redeemed prior to maturity, $50 million of debentures with an
interest rate of 9.0%. These early redemptions resulted in a $4 million
after-tax extraordinary loss.
17
5. Commitments and Contingencies
Gross rental expense totaled $13 million in 1997, $7 million in 1996 and $6
million in 1995. Minimum rental commitments at year-end 1997 are as follows:
- ------------------------------------------------- --------------------
(in thousands)
1998 $ 2,060
1999 1,040
2000 649
2001 432
2002 275
Thereafter 198
- ------------------------------------------------- --------------------
Various suits arising in the ordinary course of business are pending against
CT&T. Management cannot predict the final outcome of these actions, but believes
they will not result in a material effect on CT&T's financial statements.
6. Related Party Transactions
CT&T's related party transactions were as follows:
Affiliate
Transaction Description Company 1997 1996 1995
- -------------------------------------------- ----------------- -- ---------------- -- --------------- -- -------------
CT&T: (in thousands)
Purchased telecommunications equipment, North Supply $ 68,581 (1)(2)$ 44,653 $ 42,274
construction and maintenance equipment and Company
materials and supplies.
- -------------------------------------------- ----------------- -- ---------------- -- --------------- -- -------------
Reimbursed Sprint for data processing Sprint 57,730 50,614 51,606
services, other data-related costs and
certain management costs.
- -------------------------------------------- ----------------- -- ---------------- -- --------------- -- -------------
In 1996, filed a common interstate access Central 143,287 148,916 -
tariff with the FCC. Participated in a Telephone
pooling arrangement where interstate Company of
access revenues are based on a common rate North Carolina
of return. Amounts represent total
interstate access revenues recognized
under this arrangement.
- -------------------------------------------- ----------------- -- ---------------- -- --------------- -- -------------
(1) During 1997, Sprint centralized certain local division purchasing and
warehousing functions at North Supply Company. This resulted in increased
sales of telecommunications equipment and distribution services to CT&T.
(2) Beginning in July 1997, Sprint changed its transfer pricing for certain
transactions between affiliates to more accurately reflect market pricing.
18
7. Adoption of Accounting Principles for a Competitive Marketplace
At year-end 1995, CT&T determined that it no longer met the criteria necessary
for the continued use of SFAS 71. As a result, 1995 operating results included a
noncash, extraordinary charge of $42 million, net of income tax benefits of $52
million. The decision to discontinue using SFAS 71 was based on changes in the
regulatory framework and the convergence of competition in the
telecommunications industry.
The 1995 extraordinary charge recognized when CT&T discontinued using SFAS 71
consisted of the following:
Pretax After-Tax
- ------------------------------------------------------------------------------- --- ------------- -- -------------
(in thousands)
Increase in accumulated depreciation $ 103,277 $ 61,926
Recognition of switch software assets (15,772) (9,457)
Elimination of other net regulatory assets 6,442 3,863
-- ------------- -- -------------
Total $ 93,947 56,332
-- -------------
Tax-related net regulatory liabilities (13,225)
Accelerated ITC amortization (683)
-- -------------
Extraordinary charge $ 42,424
-- -------------
8. Additional Financial Information
Restructuring Costs
In 1995, CT&T recorded an $8 million restructuring charge. The restructuring
plan included the planned elimination over several years of approximately 150
positions at CT&T, mainly in the network and finance functions. Through 1997, a
majority of the positions have been eliminated resulting in termination benefit
payments of $7 million.
Major Customer Information
Consolidated operating revenues from AT&T, resulting mainly from network access,
billing and collection services and the lease of network facilities, totaled $98
million in 1997, $101 million in 1996 and $108 million in 1995.
CT&T's customer and other accounts receivable are not subject to significant
concentrations of credit risk due to the large number of customers in CT&T's
customer base.
19
8. Additional Financial Information (continued)
Financial Instruments
CT&T estimates the fair value of its financial instruments using available
market information and appropriate valuation methodologies. As a result,
year-end estimates do not necessarily represent the values CT&T could realize in
a current market exchange. Although management is not aware of any factors that
would affect the estimated fair value amounts presented at year-end 1997, those
amounts have not been comprehensively revalued for financial statement purposes
since that date. Therefore, fair value estimates after year-end 1997 may differ
significantly from the amounts discussed below.
CT&T's financial instruments mainly consisted of long-term debt with carrying
amounts of $199 million at year-end 1997 and 1996, and estimated fair values of
$202 million at year-end 1997 and $198 million at year-end 1996. The estimated
fair value of CT&T's long-term debt was based on quoted market prices for
publicly traded issues. The estimated fair value for all other issues was based
on the present value of estimated future cash flows using a discount rate based
on the risks involved. The carrying value of CT&T's other financial instruments
(principally short-term borrowings) approximates fair value at year-end 1997 and
1996.
CT&T has not invested in derivative financial instruments.
9. Recently Issued Accounting Pronouncement
In February 1998, the Financial Accounting Standards Board issued SFAS No. 132,
"Employers' Disclosures about Pensions and Other Postretirement Benefits." SFAS
132 standardizes the disclosure requirements for pensions and postretirement
benefits where practical. It also eliminates certain disclosures and requires
certain additional information. CT&T will adopt SFAS 132 in its 1998 year-end
financial statements. SFAS 132 is not expected to have a significant effect on
CT&T's pension and postretirement benefit plan disclosures.
20
Parts II - IV
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None
Item 10. Directors and Executive Officers of the Registrant
Omitted under the provisions of General Instruction I.
Item 11. Executive Compensation
Omitted under the provisions of General Instruction I.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Omitted under the provisions of General Instruction I.
Item 13. Certain Relationships and Related Transactions
Omitted under the provisions of General Instruction I.
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) 1. The consolidated financial statements of CT&T filed as part of
this report are listed in the Financial Statements and Supplementary
Data Index.
2. The consolidated financial statement schedule of CT&T filed as part
of this report is listed in the Financial Statements and
Supplementary Data Index.
3. The following exhibits are filed as part of this report:
EXHIBITS
(3) Articles of Incorporation and Bylaws:
(a) Articles of incorporation (filed as Exhibit 3 to 1980
Annual Report Form 10-K and incorporated herein by
reference - commission file number 1-6469).
(b) Bylaws, as amended.
21
(4) Instruments defining the rights of security holders, including
indentures
(a) The Rights of CT&T's equity security holders are defined in
its Articles of Incorporation. See Exhibit 3 (a) above.
(b) Indenture dated as of December 1, 1992, from CT&T to
Bankers Trust Company, (filed as Exhibit 4 to Registration
No. 33-64476 and incorporated herein by reference).
(12) Computation of Ratio of Earnings to Fixed Charges
(23) Consent of Ernst & Young LLP
(27) Financial Data Schedules
(a) December 31, 1997
(b) September 30, 1997 Restated
(c) June 30, 1997 Restated
(d) March 31, 1997 Restated
(e) December 31, 1996 Restated
(f) September 30, 1996 Restated
(g) June 30, 1996 Restated
(h) March 31, 1996 Restated
(i) December 31, 1995 Restated
(b) Report on Form 8-K
No reports on Form 8-K were filed during the three months ended
December 31, 1997.
(c) Exhibits are listed in Item 14(a)
22
CAROLINA TELEPHONE & TELEGRAPH COMPANY
SCHEDULE II -- CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS
Years Ended December 31, 1997, 1996 and 1995
Additions Deductions
-------------- ---------------
Accounts
Balance charged off Balance end
beginning Charged to net of of year
of year expense collections
- ----------------------------------------- -- ------------- --- -------------- --- --------------- -- -------------
(in thousands)
1997
Allowance for doubtful accounts $ 3,506 $ 11,706 $ 10,394 $ 4,818
- ----------------------------------------- -- ------------- --- -------------- --- --------------- -- -------------
1996
Allowance for doubtful accounts $ 2,348 $ 5,831 $ 4,673 $ 3,506
- ----------------------------------------- -- ------------- --- -------------- --- --------------- -- -------------
1995
Allowance for doubtful accounts $ 1,775 $ 3,474 $ 2,901 $ 2,348
- ----------------------------------------- -- ------------- --- -------------- --- --------------- -- -------------
23
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
CAROLINA TELEPHONE & TELEGRAPH COMPANY
(Registrant)
By/s/Michael B. Fuller
Michael B. Fuller
President and Chief Executive Officer
Date: March 25, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities indicated on the 25th day of March, 1998.
s/ Michael B. Fuller
Michael B. Fuller
President, Chief Executive Officer and Director
s/ Richard D. McRae
Richard D. McRae
Vice President (Chief Financial Officer) and Director
s/ John I. Lehman
John I. Lehman
Controller (Chief Accounting Officer)
s/ Don A. Jensen
Don A. Jensen
Director
EXHIBIT INDEX
(3) Articles of Incorporation and Bylaws:
(a) Articles of incorporation (filed as Exhibit 3 to 1980
Annual Report Form 10-K and incorporated herein by
reference - commission file number 1-6469).
(b) Bylaws, as amended.
(4) Instruments defining the rights of security holders, including
indentures
(a) The Rights of CT&T's equity security holders are defined in
its Articles of Incorporation. See Exhibit 3 (a) above.
(b) Indenture dated as of December 1, 1992, from CT&T to
Bankers Trust Company, (filed as Exhibit 4 to Registration
No. 33-64476 and incorporated herein by reference).
(12) Computation of Ratio of Earnings to Fixed Charges
(23) Consent of Ernst & Young LLP
(27) Financial Data Schedules
(a) December 31, 1997
(b) September 30, 1997 Restated
(c) June 30, 1997 Restated
(d) March 31, 1997 Restated
(e) December 31, 1996 Restated
(f) September 30, 1996 Restated
(g) June 30, 1996 Restated
(h) March 31, 1996 Restated
(i) December 31, 1995 Restated