Item 1. Business - -------- Carolina Telephone and Telegraph Company (the Company), a wholly-owned subsidiary of Sprint Corporation (Sprint), was incorporated under the laws of the State of North Carolina in 1968, and in 1969 acquired all of the public utility assets of the predecessor company of the same name pursuant to a plan of merger. The Company's principal offices are located at 14111 Capital Boulevard, Wake Forest, North Carolina 27587-5900 and its telephone number is (919) 554-7900. The term Company herein refers to the present Company and, as the context requires, its predecessor of the same name which was incorporated in the State of North Carolina in 1900.
The Company is engaged in the business of furnishing communication services, mainly local and long-distance services and network access, in 145 exchange areas serving all or part of 50 counties in the eastern part of North Carolina. As of December 31, 1993, the Company had an investment in property, plant and equipment of $1,595,266,000. Operating revenues for the year 1993 amounted to $638,541,000. No other company furnishes local telephone service in any exchange area served by the Company.
The principal industries in the Company's service area are agriculture, textiles, pulp and paper manufacturing, chemicals, fertilizer, and tourism. Military installations, including Fort Bragg, Camp Lejeune, Cherry Point Marine Corps Air Station, the U. S. Coast Guard Base at Elizabeth City and Pope Air Force Base contribute significantly to the economy of the area.
Digital switching equipment and fiber optics cable represent a substantial portion of the Company's expansion of long-distance facilities. At December 31, 1993, the Company served 905,534 access lines, distributed among 145 exchange areas as follows: Fayetteville, 14.7 percent; Greenville, 5.5 percent; Rocky Mount, 4.6 percent; Jacksonville, 4.2 percent; Wilson, 3.1 percent; and all other areas less than 3.0 percent each.
In addition to furnishing local service, the Company's central offices and toll lines are connected with other telephone companies and with the nationwide toll networks of interexchange carriers. Toll calls may thus be made from any telephone in the Company's service area to anywhere in the United States and most other countries. Other telecommunications services, for the most part furnished in conjunction with other telephone companies, include facilities for private line service, data transmission, radio and television program transmission, mobile radio telephone, cellular and wide area telecommunications service.
Revenues from communication services, principally telephone service, constitute about 85.9 percent of the total 1993 operating revenues of the Company. The Company has one wholly-owned subsidiary, Carolina Telephone Long Distance, Inc. (CTLD) which offers zero-plus and one-plus interlata long-distance service. A significant portion of the Company's network access revenues are derived from access charge billings to American Telephone & Telegraph Company (AT&T). Other revenues are derived in large part from the sale of telephone directory listings, the sale of telecommunications equipment, the lease of network facilities, providing operator services and processing customer toll billings for interexchange carriers, primarily AT&T.
Carolina Telephone & Telegraph Company Form 10-K Part I
Item 1. Business (continued) - -------- The following tables show certain information regarding access lines in service and toll messages handled at the dates or for the periods indicated.
Access Lines --------------------------------------------------------------- Change Number at End of Period During Period ---------------------------- ------------------- Period Residence Business Total Number % Change ------ --------- -------- ------- ------ -------- 1993 710,977 194,557 905,534 42,693 4.9 1992 681,167 181,674 862,841 36,343 4.4 1991 655,375 171,123 826,498 36,532 4.6 1990 627,778 162,188 789,966 18,514 2.4 1989 616,808 154,644 771,452 24,516 3.3
Toll Messages --------------------------------------------------------------- Total For Year Average Messages Per Day ---------------------- ------------------------ Period Number % Change Number % Change ------ ----------- -------- --------- -------- 1993 455,139,205 7.3 1,246,957 7.6 1992 424,096,621 8.8 1,158,734 8.5 1991 389,952,486 16.5 1,068,363 16.5 1990 334,783,858 7.4 917,216 7.4 1989 311,673,465 12.4 853,900 12.7
On December 31, 1993, the Company had 4,308 employees, of which 2,117 or 49.1 percent were represented by the Communications Workers of America, and 107 or 2.5 percent were represented by the International Brotherhood of Electrical Workers for collective bargaining purposes.
Compliance with federal, state and local provisions relating to the protection of the environment has had no significant effect upon capital expenditures or earnings of the Company, and future effects are not expected to be material.
Effective January 1, 1991, the Federal Communications Commission (FCC) adopted a price caps regulatory format for the Regional Bell Operating Companies and the GTE local exchange companies. Other local exchange companies (LECs) could volunteer to become subject to the price caps regulation. Under price caps, prices for access service must be adjusted annually to reflect industry average productivity gains (as specified by the FCC), inflation and certain allowed cost changes. The Company elected to be subject to price caps regulation, and under the form of the plan adopted, the Company has an opportunity to earn up to a 14.25 percent rate of return on investment.
Carolina Telephone & Telegraph Company Form 10-K Part I
Item 1. Business (continued) - ------- Areas of competition have emerged in the intralata and local market- place. On January 1, 1986, the intralata toll market in North Carolina was opened to non-facilities based carriers (resellers), and on January 1, 1987, facilities-based carriers were authorized to resell intralata toll. In February 1994, the North Carolina Utilities Commission approved an order authorizing long-distance companies to provide intralata toll service on a limited basis. This order, which is effective July 1, 1994, will offer customers choices in deciding which long-distance companies they want to use by dialing 1-0 and a designated 3 digit prefix code indicating the carrier of their choice.
In addition, the potential for more direct competition is increasing in the local service market. In May 1988, the Commission issued an order which allows customers to participate in the sharing and resale of local exchange services under shared tenant arrangements.
At the interstate level, the FCC has revised its rules to permit connection of customer-owned coin telephones to the local network, exposing LECs to direct coin telephone competition. Additionally, the FCC has assisted Competitive Access Providers (CAPs) in providing access to interexchange carriers and end users by mandating that all Tier I (over $100 million annual operating revenues) LECs allow collocation of CAP equipment in LEC central offices. The FCC's decision regarding collocation is under appeal to the U.S. Court of Appeals for the D.C. Circuit.
In October 1992, the FCC adopted a new rate structure and new pricing rules for LEC-provided switched transport. LECs filed new access transport tariffs with the FCC in September 1993, which contain rates that will purportedly reduce the costs of the largest interexchange carrier by less than 1 percent and increase the costs of the smallest carriers by less than 2 percent. The new rates, which went into effect on December 30, 1993, are not expected to have any significant impact to the LECs.
The extent and ultimate impact of competition for local exchange carriers will continue to depend, to a considerable degree, on FCC and Commission actions, court decisions and possible federal or state legislation. Legislation designed to stimulate local competition between local exchange service providers and cable programming service providers, in both markets, is presently pending in both houses of the U.S. Congress.
Carolina Telephone & Telegraph Company Form 10-K Part I
Item 2.
Item 2. Properties - ------- The properties of the Company consist principally of land, structures, facilities and equipment. Substantially all of the Company's property, plant and equipment is restricted for use under the terms of long-term debt indentures. Central office equipment represents approximately 38.1 percent of the Company's investment in telephone plant in service; land and buildings (occupied principally by central office equipment) represent 8.2 percent; telephone instruments and related wiring and equipment including private branch exchanges (PBX) (substantially all of which are located on the premises of subscribers) represent 2.9 percent; connecting lines not on subscribers' premises (the majority of which are on or under public highways and streets and the remainder on or under private property) represent 45.9 percent; and other telephone plant represents 4.9 percent. In 141 exchanges serving approximately 84.4 percent of the Company's access lines, central offices are located on land owned by the Company; in 3 exchanges serving 0.9 percent of the Company's access lines, central offices are located in leased quarters. In one exchange (Fayetteville), central offices serving an aggregate of 14.7 percent of the Company's access lines are located in quarters, some of which are owned and some of which are leased.
Standard practices prevailing in the telephone industry are followed by the Company in the construction and maintenance of its plant and facilities; and the Company considers that its plant and facilities are, as a whole, in sound physical and operating condition.
The following table shows gross additions to and retirements of properties of the Company during the five years ended December 31, 1993 (in thousands): Gross Additions Retirements --------- ----------- 1993 $146,543 $51,020 1992 143,057 89,179 1991 130,332 49,766 1990 122,760 68,754 1989 118,824 67,136
Carolina Telephone & Telegraph Company Form 10-K Part II
Item 3.
Item 3. Legal Proceedings - ------- No material legal proceedings are pending to which the Company or its subsidiary is a party or of which any of their property is the subject.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders - ------- No matter was submitted to a vote of security holders during the fourth quarter of 1993.
Item 5.
Item 5. Market for the Registrant's Common Stock and Related Stockholder - ------- Matters
The Registrant is a wholly-owned subsidiary of Sprint and consequently its common stock is not traded.
Item 6.
Item 6. Selected Financial Data (in thousands) - ------- December 31, ---------------------------------------------------- 1993 1992 1991 1990 1989 ---------- ---------- -------- -------- --------
Operating revenues $ 638,541 $ 590,440 $552,986 $509,724 $496,841
Net income 47,168 72,800 77,420 76,649 70,659
Total assets 1,078,910 1,025,295 968,806 920,489 892,575
Long-term debt (excluding current maturities) and redeemable preferred stock 269,087 240,535 224,398 226,881 229,759
During 1993, nonrecurring charges of $46,382,000 were recorded representing the portion of the costs attributable to the Company associated with the merger of Sprint and Centel Corporation. Such charges reduced 1993 net income by $27,765,000. In addition, extraordinary losses on early extinguishments of debt were recorded in 1993, which reduced net income by $2,318,000.
Earnings and dividends per share information have been omitted because the Company is a wholly-owned subsidiary of Sprint.
Carolina Telephone & Telegraph Company Form 10-K Part II
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and - ------- Results of Operations
Recent Development - ------------------
Effective March 9, 1993, Sprint consummated its merger with Centel Corporation, a telecommunications company with local exchange and cellular/wireless communications services operations (see Note 2 of "Notes to Consolidated Financial Statements" for additional information). 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 a nonrecurring charge to Sprint during 1993. The portion of such charge attributable to the Company was $46,382,000, which reduced 1993 net income by $27,765,000.
Liquidity and Capital Resources - -------------------------------
Cash flows from operating activities are the Company's primary source of liquidity. Net cash provided by operating activities increased by $30,230,000 during the year ended December 31, 1993. The increase was primarily attributable to reduced payments of amounts associated with accounts payable as well as improved operating results excluding the effects of the merger and integration costs and non-cash expenses. These increases in cash flows were partially offset by payments made related to the integration of Sprint and Centel.
In order to meet customer demands, the Company must continually replace and construct new facilities. The Company's planned construction expenditures for 1994 are $143,131,000 which includes expenditures of $74,307,000 for central office equipment, $46,477,000 for cable facilities, $11,765,000 for general support assets and $10,582,000 for other expenditures. The Company anticipates that the funds for these expenditures will be supplied primarily by operating activities.
The primary source of financing for the Company has 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 increased $30,841,000 during the year ended December 31, 1993, compared to the same period in 1992. During 1993, the Company issued $150,000,000 in long-term debt. The proceeds of this debt were primarily used to reduce short-term debt and to retire existing higher cost long-term debt prior to scheduled maturities. The prepayment penalties incurred in connection with these early extinguishments of debt and the write-off of related debt issuance costs and unamortized premiums and discounts were $3,836,000, which reduced net income by $2,318,000. The increase in cash used related to debt activity was partially offset by reduced dividend payments during 1993.
Carolina Telephone & Telegraph Company Form 10-K Part II
Item 7. Management's Discussion and Analysis of Financial Condition and - ------- Results of Operations (continued)
Liquidity and Capital Resources (continued) - -------------------------------------------
As of December 31, 1993, the Company had a total of $60,000,000 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 December 31, 1993, no amounts were borrowed against this credit facility; however, $41,100,000 of the bank line supports the commercial paper outstanding at year end.
The Company is also authorized to issue and sell an additional $75,000,000 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 new debentures, which may be issued and sold in future offerings, are available to refinance existing debt at lower interest rates, if appropriate.
The Company's ratio of common equity to total capital was 59.2 percent in 1993, 59.1 percent in 1992, and 61.1 percent in 1991. The Company's ratio of long-term debt to total capital was 35.4 percent in 1993, 33.2 percent in 1992, and 33.2 percent in 1991. The Company's ratio of short-term debt to total capital was 5.4 percent in 1993, 7.7 percent in 1992, and 5.7 percent in 1991.
Operating Results - -----------------
Operating revenues are classified as local service, network access, long-distance network and miscellaneous. Local service revenues come from providing local telephone exchange services and leasing equipment. Network access revenues are derived from billing other carriers and telephone customers for their use of the local network to complete long- distance calls in those instances where the long-distance service is not provided by the Company. Long-distance revenues are derived principally from providing long-distance services within designated areas. Miscellaneous revenues primarily relate to directory advertising, billing and collection services for interexchange long-distance carriers, operator services, network facilities leases and sales of telecommunications equipment.
Operating revenues increased by $48,101,000 or 8.1 percent during the year ended December 31, 1993 as compared to 1992. All categories of operating revenues increased during the year.
Local service revenues increased $20,502,000 or 8.7 percent during 1993 as compared to 1992. Basic area service revenues contributed $10,713,000 to this increase, primarily attributable to a 4.9 percent growth in access lines during 1993. Basic area service revenues have also been impacted by the implementation of regional calling plans which have resulted in a transfer of long distance revenues to the local revenue category. Custom calling and touch tone features also added to the local service revenues as a result of access line gains and increased marketing promotions.
Carolina Telephone & Telegraph Company Form 10-K Part II
Item 7. Management's Discussion and Analysis of Financial Condition and - ------- Results of Operations (continued)
Operating Results (continued) - -----------------------------
Network access revenues increased $19,460,000 or 11.4 percent during the year ended December 31, 1993 as compared to 1992 due primarily to an 8.0 percent growth in access minutes of use during 1993.
Miscellaneous revenues increased $6,518,000 or 7.8 percent during the year ended December 31, 1993 as compared to 1992. Additional telephone equipment sales and installation revenue of $6,358,000 is largely responsible for the increase during 1993. The equipment sales revenues related principally to PBX, data and key systems. North Carolina Utility Services (NCUS), a non-regulated business venture specializing in locating underground utility lines, contributed $4,703,000, due to the expansion of the service area and an increase of the customer base in existing service areas. These increases were partially offset by decreased revenues related to billing and collection services provided to interexchange carriers as well as lowered revenues associated with the lease and provision of transmission facilities to interexchange carriers.
Customer operations expenses increased $13,379,000 or 18.0 percent during 1993 as compared to 1992. Sales expense increased significantly during 1993, as the Company continues to intensify its efforts to achieve an increased market share and gain knowledge of its customer expectations. The results of these efforts are demonstrated in the current year increase in telephone equipment sales. As a result of continued expansions of its customer base, NCUS experienced increases in cost of goods and services during 1993. Billing services also contributed to the increase in customer operations expense, primarily due to expenses incurred during the first part of 1993 related to the development and implementation of new billing systems. Business office operations also experienced increased expenses during 1993, principally due to increased staffing requirements and expenses related to the administration and service center charges for 800 portability services.
As previously discussed, nonrecurring merger and integration costs totaling $46,382,000 were recognized during 1993.
Other operating expenses increased $2,836,000 or 17.3 percent during 1993 as compared to 1992. This fluctuation was primarily due to a $4,636,000 increase in cost of equipment sales, generally corresponding with the overall trend in equipment sales. This increase was partially offset by a reduction in the losses associated with nonregulated activities during 1993.
In addition to the increases discussed above, plant expense, customer operations expense, corporate operations expense and other operating expense also increased as a result of higher postretirement benefits costs due to the adoption of Statement of Financial Accounting Standards (SFAS) No. 106, "Employers' Accounting for Postretirement Benefits Other than Pensions." The incremental cost associated with this change in accounting principle was approximately $15,159,000.
Carolina Telephone & Telegraph Company Form 10-K Part II
Item 7. Management's Discussion and Analysis of Financial Condition and - ------- Results of Operations (continued)
Effects of Inflation - --------------------
The effects of inflation on the operations of the Company were not significant during 1993, 1992 or 1991.
Recent Accounting Developments - ------------------------------
Effective January 1, 1994, the Company will adopt Statement of Financial Accounting Standards No. 112, "Employers' Accounting for Postemployment Benefits" (see Note 1 of "Notes to Consolidated Financial Statements" for additional information).
Consistent with most local exchange carriers, the Company accounts for the economic effects of regulation pursuant to 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's management believes that the Company's operations meet the criteria for the continued application of the provisions of SFAS No. 71. With increasing competition and the changing nature of regulation in the telecommunications industry, the ongoing applicability of SFAS No. 71 must, however, be constantly monitored and evaluated. Should the Company no longer qualify for the application of the provisions of SFAS No. 71 at some future date, the accounting impact could result in the recognition of a material, extraordinary, non-cash charge.
Carolina Telephone & Telegraph Company Form 10-K Part II
Item 8.
Item 8. Financial Statements and Supplementary Data - -------
CAROLINA TELEPHONE AND TELEGRAPH COMPANY INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page Reference --------------
Report of Independent Auditors Page 11
Consolidated Balance Sheets as of December 31, 1993 and 1992 Pages 12 - 13
Consolidated Statements of Income for each of the three years ended December 31, 1993 Page 14
Consolidated Statements of Retained Earnings for each of the three years ended December 31, 1993 Page 15
Consolidated Statements of Cash Flows for each of the three years ended December 31, 1993 Pages 16 - 17
Notes to Consolidated Financial Statements Pages 18 - 30
Carolina Telephone & Telegraph Company Form 10-K Part II
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, a wholly-owned subsidiary of Sprint Corporation, as of December 31, 1993 and 1992, and the related consolidated statements of income, retained earnings, and cash flows for each of the three years in the period ended December 31, 1993. Our audits also included the financial statement schedules listed in the Index at Item 14(a). These financial statements and schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedules 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 and related schedules 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 Carolina Telephone and Telegraph Company at December 31, 1993 and 1992, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1993 in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein.
As discussed in Note 1 to the consolidated financial statements, Carolina Telephone and Telegraph Company changed its method of accounting for postretirement benefits in 1993.
ERNST & YOUNG
Kansas City, Missouri January 21, 1994
Carolina Telephone & Telegraph Company Form 10-K Part II
CAROLINA TELEPHONE AND TELEGRAPH COMPANY CONSOLIDATED BALANCE SHEETS December 31, 1993 and 1992 (In Thousands)
1993 1992 ---------- ---------- ASSETS - ------
CURRENT ASSETS Cash $ 1 $ 1 Receivables Customers and other, net of allowance for doubtful accounts of $1,895 ($1,415 in 1992) 63,090 60,957 Interexchange carriers 20,238 17,713 Affiliated companies 4,699 2,256 Inventories 9,807 7,861 Prepayments and other 870 1,573 ---------- ---------- 98,705 90,361
PROPERTY, PLANT AND EQUIPMENT Land and buildings 128,635 120,560 Telephone network equipment and outside plant 1,370,948 1,296,144 Other 78,455 71,366 Construction in progress 17,228 11,673 ---------- ---------- 1,595,266 1,499,743 Less accumulated depreciation 673,839 610,603 ---------- ---------- 921,427 889,140
DEFERRED CHARGES AND OTHER ASSETS 58,778 45,794 ---------- ----------
$1,078,910 $1,025,295 ========== ==========
(Continued)
Carolina Telephone & Telegraph Company Form 10-K Part II
CAROLINA TELEPHONE AND TELEGRAPH COMPANY CONSOLIDATED BALANCE SHEETS (CONTINUED) December 31, 1993 and 1992 (In Thousands)
1993 1992 ---------- ---------- LIABILITIES AND STOCKHOLDER'S EQUITY - ------------------------------------
CURRENT LIABILITIES Outstanding checks in excess of cash balances $ 9,303 $ 8,169 Short-term borrowings Commercial paper 41,100 55,500 Advances from parent company - 1,703 Current maturities of long-term debt 568 7,717 Accounts payable: Vendors and other 20,742 14,846 Interexchange carriers 22,950 22,270 Affiliated companies 10,866 5,272 Accrued merger and integration costs 17,035 - Accrued taxes 13,298 13,897 Advance billings 11,653 11,262 Accrued vacation pay 10,550 10,493 Other 20,484 19,056 ---------- ---------- 178,549 170,185
LONG-TERM DEBT 269,087 240,535
DEFERRED CREDITS AND OTHER LIABILITIES Deferred income taxes 113,399 118,540 Deferred investment tax credits 6,790 10,830 Regulatory liability 26,338 32,903 Postretirement benefits obligation 22,542 3,750 Other 11,919 6,847 ---------- ---------- 180,988 172,870
COMMITMENTS
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 305,765 297,184 ---------- ---------- 450,286 441,705 ---------- ----------
$1,078,910 $1,025,295 ========== ==========
See Notes to Consolidated Financial Statements.
Carolina Telephone & Telegraph Company Form 10-K Part II
CAROLINA TELEPHONE AND TELEGRAPH COMPANY CONSOLIDATED STATEMENTS OF INCOME Years ended December 31, 1993, 1992, and 1991 (In Thousands)
1993 1992 1991 -------- -------- -------- OPERATING REVENUES Local service $257,050 $236,548 $219,194 Network access 189,747 170,287 165,725 Long-distance network 101,581 99,960 97,474 Miscellaneous 90,163 83,645 70,593 -------- -------- -------- 638,541 590,440 552,986
OPERATING EXPENSES Plant expense 192,297 181,658 169,209 Depreciation 114,765 109,865 94,288 Customer operations 87,668 74,289 63,374 Corporate operations 64,400 58,300 59,932 Merger and integration costs 46,382 - - Other operating expenses 19,247 16,411 12,951 Taxes: Federal income: Current 33,786 34,218 37,826 Deferred (9,064) 1,797 1,154 Deferred investment tax credit (4,040) (4,925) (5,369) State, local and miscellaneous 22,352 25,094 25,629 -------- -------- -------- 567,793 496,707 458,994 -------- -------- --------
OPERATING INCOME 70,748 93,733 93,992
INTEREST CHARGES Interest on long-term debt 19,232 18,735 18,783 Other interest 2,728 3,432 1,259 -------- -------- -------- 21,960 22,167 20,042
OTHER INCOME Interest charged to construction 54 632 87 Other, net 644 602 3,383 -------- -------- -------- 698 1,234 3,470 -------- -------- -------- INCOME BEFORE EXTRAORDINARY ITEM 49,486 72,800 77,420
EXTRAORDINARY LOSSES ON EARLY EXTINGUISHMENTS OF DEBT, NET 2,318 - - -------- -------- --------
NET INCOME $ 47,168 $ 72,800 $ 77,420 ======== ======== ========
See Notes to Consolidated Financial Statements.
Carolina Telephone & Telegraph Company Form 10-K Part II
CAROLINA TELEPHONE AND TELEGRAPH COMPANY CONSOLIDATED STATEMENTS OF RETAINED EARNINGS Years ended December 31, 1993, 1992, and 1991 (In Thousands)
1993 1992 1991 -------- -------- --------
BALANCE AT BEGINNING OF YEAR $297,184 $272,262 $249,445
Net Income 47,168 72,800 77,420
Cash dividends Common stock (38,587) (47,869) (54,578) Preferred stock - (9) (25) -------- -------- --------
BALANCE AT END OF YEAR $305,765 $297,184 $272,262 ======== ======== ========
See Notes to Consolidated Financial Statements.
Carolina Telephone & Telegraph Company Form 10-K Part II
CAROLINA TELEPHONE AND TELEGRAPH COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS Years ended December 31, 1993, 1992, and 1991 (In Thousands)
1993 1992 1991 -------- -------- ------- OPERATING ACTIVITIES
Net Income $ 47,168 $ 72,800 $ 77,420 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 114,765 109,865 94,288 Deferred income taxes and investment tax credits (14,695) (2,030) (3,240) Extraordinary losses on early extinguishments of debt 3,836 - - Changes in operating assets and liabilities: Receivables, net (7,101) (3,714) (5,489) Inventories (1,946) 264 1,682 Other current assets 703 19 (487) Accounts payable 12,170 (10,371) (2,154) Other current liabilities 19,231 (2,153) 12,735 Noncurrent assets and liabilities, net 23,597 1,000 2,750 Other, net (7,540) (5,722) (4,409) ------- ------- -------
NET CASH PROVIDED BY OPERATING ACTIVITIES 190,188 159,958 173,096
INVESTING ACTIVITIES
Additions to property, plant and equipment (146,543) (143,057) (130,332) Net cost to retire plant and equipment (509) (599) (478) Additions to investments (4,865) (8,872) (2,979) -------- -------- --------
NET CASH USED BY INVESTING ACTIVITIES (151,917) (152,528) (133,789)
(Continued)
Carolina Telephone & Telegraph Company Form 10-K Part II
CAROLINA TELEPHONE AND TELEGRAPH COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) Years ended December 31, 1993, 1992, and 1991 (In Thousands)
1993 1992 1991 ------- ------- -------
FINANCING ACTIVITIES
Proceeds from long-term borrowings $148,638 $ 49,382 $ - Retirements of long-term debt (127,521) (27,537) (2,954) Increase (decrease) in commercial paper (14,400) 25,500 9,900 Increase (decrease) in advances from parent company (1,703) (6,797) 8,500 Redemption of preferred stock - (100) (150) Dividends paid (38,587) (47,878) (54,603) Other (4,698) - - -------- -------- -------
NET CASH USED BY FINANCING ACTIVITIES (38,271) (7,430) (39,307)
CHANGE IN CASH - - -
CASH AT BEGINNING OF YEAR 1 1 1 -------- -------- --------
CASH AT END OF YEAR $ 1 $ 1 $ 1 ======== ======== ========
See Notes to Consolidated Financial Statements.
Carolina Telephone & Telegraph Company Form 10-K Part II
CAROLINA TELEPHONE AND TELEGRAPH COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1993
1. ACCOUNTING POLICIES
Carolina Telephone and Telegraph Company is engaged in the business of providing communications services, principally local, network access and long distance services in North Carolina. The principal industries in its service area include agriculture, textiles, pulp and paper manufacturing, chemicals, and tourism.
Basis of Presentation - ---------------------
The accompanying consolidated financial statements include the accounts of Carolina Telephone & Telegraph Company and its wholly-owned subsidiary, Carolina Telephone Long Distance, Inc. (CTLD), collectively referred to as the "Company". All significant intercompany transactions have been eliminated. The Company is a wholly-owned subsidiary of Sprint Corporation (Sprint); accordingly, earnings per share information has been omitted.
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", which requires the accounting recognition of the rate actions of regulators where appropriate. Such actions can provide reasonable assurance of the existence of an asset, reduce or eliminate the value of an asset, or impose a liability on a regulated enterprise.
Certain amounts in the accompanying consolidated financial statements for 1992 and 1991 have been reclassified to conform to the presentation of amounts in the 1993 consolidated financial statements. These reclassifications had no effect on net income in either year.
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. The sales inventory balances were $2,604,000 and $2,156,000 at December 31, 1993 and 1992, respectively.
Property, Plant and Equipment - -----------------------------
Property, plant and equipment are recorded at cost. Retirements of depreciable property are charged against accumulated depreciation with no gain or loss recognized. Repairs and maintenance costs are expensed as incurred.
Carolina Telephone & Telegraph Company Form 10-K Part II
CAROLINA TELEPHONE AND TELEGRAPH COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1993
1. ACCOUNTING POLICIES (continued)
Depreciation - ------------
Depreciation expense is generally computed on a straight-line basis over estimated useful lives as prescribed by regulatory commissions. Depreciation rate changes granted by the North Carolina Utilities Commission (Commission) resulted in additional depreciation expense in 1992 of $19,365,000 which reduced net income by $11,245,000 after considering the partial offset from the related revenue settlement and income tax effects. There were no depreciation rate changes during 1993 or 1991. In addition, as ordered by the Commission, the Company recorded nonrecurring charges to depreciation expense in 1991 of $9,000,000 which reduced net income by $5,016,000. Average annual composite depreciation rates, excluding the nonrecurring charges, were 7.5 percent for 1993, 7.6 percent for 1992 and 6.2 percent for 1991.
Income Taxes - ------------
Operations of the Company are included in the consolidated federal income tax returns of Sprint. Federal income tax is calculated by the Company on the basis of its filing a separate return.
Effective January 1, 1992, the Company changed its method of accounting for income taxes by adopting SFAS No. 109, "Accounting for Income Taxes", which requires an asset and liability approach to accounting for income taxes. Under the provisions of SFAS No. 109, the Company adjusted existing deferred income tax amounts, using current tax rates, for the estimated future tax effects attributable to temporary differences between the tax bases of the Company's assets and liabilities and their reported amounts in the financial statements. The Company's principal temporary difference results from using different depreciable lives and methods with respect to its property, plant and equipment for tax and financial reporting purposes.
As a result of corporate income tax rate reductions in prior years and the previous income tax accounting standards which did not permit accumulated deferred income tax amounts to be adjusted for subsequent tax rate changes, adoption of SFAS No. 109 resulted in a decrease in the amount of deferred income tax liabilities recorded. However, because this decrease will accrue to the benefit of the Company's customers through future telephone rates established by the Company's regulators, this decrease in deferred income tax liabilities has been reflected as a regulatory liability in the Company's financial statements.
Accordingly, the adoption of SFAS No. 109 had no significant effect upon the Company's 1992 net income. As allowed by SFAS No. 109, prior years' consolidated financial statements were not restated.
Carolina Telephone & Telegraph Company Form 10-K Part II
CAROLINA TELEPHONE AND TELEGRAPH COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1993
1. ACCOUNTING POLICIES (continued)
Income Taxes (continued) - ------------------------
During 1991, in accordance with Accounting Principles Board Opinion No. 11, deferred income taxes were provided for all differences in timing of reporting income and expenses for financial statement and income tax purposes, except for items that were not allowable by the Federal Communications Commission (FCC) or the Commission as an expense for rate- making purposes.
Investment tax credits (ITC) are deferred and amortized over the useful life of the related property. The Tax Reform Act of 1986 effectively eliminated ITC after December 31, 1985.
Postretirement Benefits - -----------------------
Effective January 1, 1993, the Company changed its method of accounting for postretirement benefits (principally health care benefits) provided to certain retirees by adopting SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions." SFAS No. 106 requires accrual of the expected cost of providing postretirement benefits to employees and their dependents or beneficiaries during the years employees earn the benefits. As permitted by SFAS No. 106, the Company elected to recognize the obligation for postretirement benefits already earned by its current retirees and active work force as of January 1, 1993 by amortizing such obligation on a straight-line basis over a period of twenty years.
During 1992 and 1991, the Company expensed postretirement benefits as such costs were paid.
Postemployment Benefits - -----------------------
Effective January 1, 1994, the Company will adopt SFAS No. 112, "Employers' Accounting for Postemployment Benefits." Under the new standard, the Company is required to recognize certain previously unrecorded obligations for benefits provided to former or inactive employees and their dependents, after employment but before retirement. Postemployment benefits offered by the Company include severance, workers' compensation and disability benefits, including the continuation of other benefits such as health care and life insurance coverage. As required by the standard, the Company will recognize its obligations for postemployment benefits through a cumulative adjustment in the consolidated income statement. The resulting nonrecurring, non-cash charge will not significantly impact the Company's 1994 net income. Adoption of this standard is not expected to significantly impact future operating expenses.
Carolina Telephone & Telegraph Company Form 10-K Part II
CAROLINA TELEPHONE AND TELEGRAPH COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1993
1. ACCOUNTING POLICIES (continued)
Interest Charged to Construction - --------------------------------
In accordance with the Uniform System of Accounts, as prescribed by the FCC, interest is capitalized only on those telephone plant construction projects for which the estimated construction period exceeds one year.
2. MERGER AND INTEGRATION COSTS
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. Pursuant to the Agreement and Plan of Merger dated May 27, 1992, Sprint issued 1.37 shares of its common stock in exchange for each outstanding share of Centel common stock.
The operations of the merged companies are being integrated and restructured to achieve efficiencies which are expected to yield significant operational synergies and cost savings. The transaction costs associated with the merger and the estimated expenses of integrating and restructuring the operations of the two companies resulted in nonrecurring charges to Sprint during 1993. The portion of such charges attributable to the Company was $46,382,000, which reduced 1993 net income by approximately $27,765,000.
3. EMPLOYEE BENEFIT PLANS
Defined Benefit Pension Plan - ----------------------------
Substantially all employees of the Company are covered by a noncontributory defined benefit pension plan. For participants of the plan represented by collective bargaining units, benefits are based upon schedules of defined amounts as negotiated by the respective parties. For participants not covered by collective bargaining agreements, the plan provides pension benefits based upon years of service and participants' compensation.
The Company's policy is to make contributions to the plan each year 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. As of December 31, 1993, the plan's assets consisted principally of investments in corporate equity securities and U.S. government and corporate debt securities.
Carolina Telephone & Telegraph Company Form 10-K Part II
CAROLINA TELEPHONE AND TELEGRAPH COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1993
3. EMPLOYEE BENEFIT PLANS (continued)
Defined Benefit Pension Plan (continued) - ----------------------------------------
The components of the net pension credits and related assumptions are as follows (in thousands): 1993 1992 1991 -------- -------- -------- Service cost -- benefits earned during the period $ 5,505 $ 4,739 $ 4,622 Interest cost on projected benefit obligation 15,654 14,745 14,047 Actual return on plan assets (41,636) (15,461) (65,761) Net amortization and deferral 11,403 (9,789) 42,132 -------- -------- --------
Net pension credit $ (9,074) $ (5,766) $ (4,960) ======== ======== ========
Discount rate 8.00% 8.50% 8.50% Expected long-term rate of return on plan assets 9.50% 8.25% 8.25% Anticipated composite rate of future increases in compensation 5.50% 6.33% 7.02%
In addition, the Company recognized pension curtailment gains of $98,000 during 1993 as a result of the integration actions as discussed in Note 2.
The funded status and amounts recognized in the consolidated balance sheets for the plan, as of December 31, are as follows (in thousands):
1993 1992 --------- --------- Actuarial present value of pension benefit obligations Vested benefit obligation $(207,186) $(166,022) ========= =========
Accumulated benefit obligation $(231,695) $(182,369) ========= =========
Projected benefit obligation $(241,000) $(198,533) Plan assets at fair value 344,187 311,202 --------- --------- Plan assets in excess of the projected benefit obligation 103,187 112,669 Unrecognized net gains (35,769) (40,377) Unrecognized prior service cost (benefit) 5,464 (4,112) Unamortized portion of transition asset (40,236) (44,706) --------- ---------
Prepaid pension cost $ 32,646 $ 23,474 ========= =========
Carolina Telephone & Telegraph Company Form 10-K Part II
CAROLINA TELEPHONE AND TELEGRAPH COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1993
3. EMPLOYEE BENEFIT PLANS (continued)
Defined Benefit Pension Plan (continued) - ----------------------------------------
The projected benefit obligations as of December 31, 1993 and 1992 were determined using a discount rate of 7.50 percent for 1993 and 8.00 percent for 1992, and anticipated composite rates of future increases in compensation of 4.50 percent for 1993 and 5.50 percent for 1992.
Defined Contribution Plans - --------------------------
Sprint sponsors two defined contribution employee savings plans covering substantially all employees of the Company. Participants may contribute portions of their compensation to the plans. Contributions of participants represented by collective bargaining units are matched by the Company based upon defined amounts as negotiated by the respective parties. Contributions of participants not covered by collective bargaining agreements are also matched by the Company. For these participants, the Company provides matching contributions equal to 50 percent of participants' contributions up to 6 percent of their base compensation and may, at the discretion of Sprint's Board of Directors, provide additional matching contributions based upon the performance of Sprint's common stock price in comparison to other telecommunications companies. The Company's contributions to the plans aggregated $3,278,000, $2,195,000 and $2,300,000 in 1993, 1992 and 1991, respectively.
Postretirement Benefits - -----------------------
The Company provides other postretirement benefits (principally health care benefits) to certain retirees. Substantially all employees who retired from the Company before January 1, 1991 became eligible for these postretirement benefits at reduced cost to the retirees. Employees retiring after such date, who meet specified age and years of service requirements, are eligible for these benefits on a shared cost basis, with the Company's portion of the cost determined by the retirees' years of credited service at retirement. The Company funds the accrued costs as benefits are paid.
For regulatory purposes, the FCC permits recognition of net postretirement benefits costs, including amortization of the transition obligation, in accordance with SFAS No. 106. The Company is also recording postretirement benefits costs in accordance with SFAS No. 106 for state regulatory purposes, pending direction from the Commission in future rate- making procedures.
Carolina Telephone & Telegraph Company Form 10-K Part II
CAROLINA TELEPHONE AND TELEGRAPH COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1993
3. EMPLOYEE BENEFIT PLANS (continued)
Postretirement Benefits (continued) - -----------------------------------
The components of the 1993 net postretirement benefits cost are as follows (in thousands):
Service cost-benefits earned during the period $ 2,514 Interest on accumulated postretirement benefits obligation 9,599 Amortization of transition obligation 5,912 ---------
Net postretirement benefits cost $ 18,025 =========
For measurement purposes, an annual health care cost trend rate of 13 percent was assumed for 1993, gradually decreasing to 6 percent by 2001 and remaining constant thereafter. The effect of a one percent increase in the assumed trend rate would have increased the 1993 net postretirement benefits cost by approximately $328,000. The discount rate for 1993 was 8 percent.
In addition, the Company recognized postretirement benefits curtailment losses of $2,963,000 during 1993 as a result of the integration actions as discussed in Note 2.
The cost of providing health care benefits to retirees was $2,383,000 and $2,382,000 in 1992 and 1991, respectively.
The amount recognized in the consolidated balance sheet as of December 31, 1993 is as follows (in thousands):
Accumulated postretirement benefits obligation Retirees $ 52,590 Active plan participants - fully eligible 32,830 Active plan participants - other 45,727 --------- 131,147
Unrecognized net gains 3,387 Unrecognized transition obligation (111,992) ---------
Accrued postretirement benefits cost $ 22,542 =========
The accumulated benefits obligation as of December 31, 1993 was determined using a discount rate of 7.5 percent. An annual health care cost trend rate of 12 percent was assumed for 1994, gradually decreasing to 6 percent by 2001 and remaining constant thereafter. The effect of a one percent annual increase in the assumed health care cost trend rate would have increased the accumulated benefits obligations as of December 31, 1993 by approximately $32,830,000.
Carolina Telephone & Telegraph Company Form 10-K Part II
CAROLINA TELEPHONE AND TELEGRAPH COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1993
4. INCOME TAXES
The components of federal and state income tax expense are as follows (in thousands):
1993 1992 1991 -------- -------- -------- Federal income taxes Current $ 33,786 $ 34,218 $ 37,826 Deferred (9,064) 1,797 1,154 Amortization of deferred ITC (4,040) (4,925) (5,369) -------- -------- -------- 20,682 31,090 33,611
State income taxes Current 7,746 8,242 9,162 Deferred (1,591) 1,098 975 -------- -------- -------- 6,155 9,340 10,137 -------- -------- --------
Total income tax expense $ 26,837 $ 40,430 $ 43,748 ======== ======== ========
In 1993 income tax benefits of $1,518,000 associated with the extraordinary losses incurred related to the early extinguishments of debt were reflected as reductions of such losses in the consolidated statements of income.
The differences which cause the effective income tax rate to vary from the statutory federal income tax rate of 35 percent in 1993 and 34 percent in 1992 and 1991 are as follows (in thousands):
1993 1992 1991 -------- -------- -------- Federal income tax at the statutory rate $ 26,713 $ 38,498 $ 41,197 Less amortization of deferred ITC 4,040 4,883 5,200 -------- -------- -------- Expected federal income tax provision after amortization of deferred ITC 22,673 33,615 35,997 Effect of Differences required to be flowed through by regulatory commissions 543 673 290 Reversal of rate differentials (1,096) (1,496) (1,821) State income tax, net of federal income tax effect 4,001 6,164 6,690 Other, net 716 1,474 2,592 -------- -------- --------
Income tax expense, including ITC $ 26,837 $ 40,430 $ 43,748 ======== ======== ========
Effective income tax rate 35.2% 35.7% 36.1% ======== ======== ========
Carolina Telephone & Telegraph Company Form 10-K Part II
CAROLINA TELEPHONE AND TELEGRAPH COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1993
4. INCOME TAXES (continued)
During 1993 and 1992, in accordance with SFAS No. 109, deferred income taxes were provided for the temporary differences between the carrying amounts of the Company's 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 as of December 31, along with the income tax effect of each, are as follows (in thousands):
1993 1992 --------------------- --------------------- Deferred Income Tax Deferred Income Tax --------------------- --------------------- Assets Liabilities Assets Liabilities -------- ----------- -------- ----------- Property, plant and equipment $ - $122,697 $ - $114,888 Allowance for doubtful accounts 373 - 426 - Expense accruals 2,795 - - 3,235 Deferred ITC - 6,790 - 10,830 Other, net 5,726 - 265 1,296 -------- -------- -------- -------- $ 8,894 $129,487 $ 691 $130,249 ======== ======== ======== ========
On August 10, 1993, the Revenue Reconciliation Act of 1993 (the Act) was enacted which, among other changes, raised the federal income tax rate for corporations to 35 percent from 34 percent, retroactive to the beginning of the year. Pursuant to SFAS No. 71, the resulting adjustments to the Company's deferred income tax assets and liabilities to reflect the revised rate have generally been reflected as reductions to the related regulatory liabilities.
During 1991, in accordance with APB No. 11, deferred income tax provisions resulted from the differences in the timing of recognizing certain revenues and expenses for financial statement and income tax purposes. The sources of the differences, along with the income tax effect of each, were as follows (in thousands):
Property, plant and equipment $ 6,331 Pension costs 1,869 Revenue accruals 1,098 Expense accruals (6,647) Other, net (522) ------- $ 2,129 =======
Carolina Telephone & Telegraph Company Form 10-K Part II
CAROLINA TELEPHONE AND TELEGRAPH COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1993
5. LONG-TERM DEBT AND EXTRAORDINARY LOSSES ON EXTINGUISHMENTS
Long-term debt as of December 31, excluding current maturities, is as follows (in thousands):
1993 1992 --------------------------- -------- Weighted Average Amount Interest Rate Amount -------- ---------------- -------- Debentures, maturities 1995 - 2016 $271,878 6.81% $242,052
Other notes, maturities 1995 - 1998 219 9.51% 345
Unamortized debt discount (3,010) (1,862) -------- -------- $269,087 $240,535 ======== ========
Long-term debt maturities during each of the next five years are as follows (in thousands):
Year Amount ---- ------- 1994 $ 568 1995 8,575 1996 12,663 1997 841 1998 6
The first mortgage bonds and notes are secured by substantially all of the Company's property, plant and equipment.
As of December 31, 1993, the Company had lines of credit with banks totaling $60,000,000. No amounts were borrowed against these lines of credit at year end. The bank lines, which are renewable in April 1994, provide for short-term borrowings at market rates of interest and require annual commitment fees based on the unused portion. Lines of credit, which support both outstanding commercial paper and notes payable to banks, may be withdrawn by the banks if there is a material adverse change in the financial condition of the Company.
During 1993, the Company redeemed prior to scheduled maturities $120,209,000 of first mortgage bonds and debentures with interest rates ranging from 7.75 percent to 11.75 percent. Prepayment penalties incurred in connection with the early extinguishments of debt and the write-off of related debt issuance costs and unamortized debt discounts and premiums, net of the related income tax benefits, are reflected as extraordinary losses in the 1993 consolidated statement of income.
Carolina Telephone & Telegraph Company Form 10-K Part II
CAROLINA TELEPHONE AND TELEGRAPH COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1993
6. COMMITMENTS
Gross rental expense aggregated $6,959,000 in 1993, $6,145,000 in 1992 and $6,967,000 in 1991.
The Company's planned capital expenditures for the year ending December 31, 1994 are approximately $143,131,000. Normal purchase commitments have been or will be made for these planned expenditures.
7. RELATED PARTY TRANSACTIONS
The Company purchases telecommunications equipment, construction and maintenance equipment, and materials and supplies from its affiliate, North Supply Company. Total purchases for 1993, 1992, and 1991 were $47,401,000, $45,272,000 and $36,421,000, respectively.
Under an agreement with Sprint, the Company reimburses Sprint for data processing services, other data related costs and certain management costs which are incurred for the Company's benefit. A credit resulting from deferred income taxes on intercompany profits is also allocated by Sprint to affiliated companies. Total charges to the Company aggregated $55,885,000, $43,481,000 and $36,590,000 in 1993, 1992 and 1991, respectively, and the credit relating to deferred income taxes was $852,500, $714,000 and $824,000 in 1993, 1992 and 1991, respectively. The Company enters into cash advance and borrowing transactions with Sprint; generally, interest on such transactions is computed based on the prior month's thirty-day average commercial paper index, as published in the Federal Reserve Statistical Release H.15, plus 45 basis points. Interest expense on such advances from Sprint was $19,800, $402,000 and $101,000 in 1993, 1992 and 1991, respectively. Interest income on such advances to Sprint was $51,000, $9,100 and $21,500 in 1993, 1992 and 1991, respectively.
Sprint Publishing & Advertising, an affiliate, pays the Company a fee for the right to publish telephone directories in the Company's operating territory, a listing fee, and a fee for billing and collection services performed for Sprint Publishing & Advertising by the Company. For 1993, 1992 and 1991, Sprint Publishing & Advertising paid the Company a total of $21,759,000, $21,526,000 and $20,109,000, respectively. The Company paid Sprint Publishing & Advertising $1,543,000, $1,515,000 and $1,174,000 in 1993, 1992 and 1991, respectively, for its costs of publishing the white page portion of the directories.
Carolina Telephone & Telegraph Company Form 10-K Part II
CAROLINA TELEPHONE AND TELEGRAPH COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1993
7. RELATED PARTY TRANSACTIONS (continued)
The Company provides various services to Sprint's long distance communications services division, such as network access, operator and billing and collection services, and the lease of network facilities. The Company recognized income of $18,017,000, $16,698,000 and $15,694,000 in 1993, 1992 and 1991, respectively, for these services. The Company paid Sprint's long distance communications services division $25,000,000, $22,811,000 and $21,797,000 in 1993, 1992 and 1991, respectively, for interexchange telecommunications services.
The Company provides services such as operator assistance, directory assistance, end user trouble report processing and payment processing for United Telephone-Southeast, Inc. (an affiliate) and United Telephone Company of the Carolinas, (an affiliate). The Company recognized income of $3,324,000, $2,525,000, and $1,025,000 during 1993, 1992 and 1991, respectively, for these services.
Certain directors and officers of the Company are also directors or officers of banks at which the Company conducts borrowings and related transactions. The terms are comparable with other banks at which the Company has similar transactions.
8. ADDITIONAL FINANCIAL INFORMATION
Financial Instruments Information - ---------------------------------
The Company's financial instruments consist of long-term debt, including current maturities, with carrying amounts as of December 31, 1993 and 1992 of $269,655,000 and $248,252,000, respectively, and estimated fair values of $288,871,000 and $257,624,000, respectively. The fair values are estimated based on quoted market prices for publicly-traded issues, and based on the present value of estimated future cash flows using a discount rate commensurate with the risks involved for all other issues.
The carrying values of the Company's other financial instruments (principally short-term borrowings) approximate fair value as of December 31, 1993 and 1992.
Carolina Telephone & Telegraph Company Form 10-K Part II
CAROLINA TELEPHONE AND TELEGRAPH COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1993
8. ADDITIONAL FINANCIAL INFORMATION (continued)
Supplemental Cash Flows Information - -----------------------------------
The supplemental disclosures required for the consolidated statements of cash flows for the years ended December 31, are as follows (in thousands):
1993 1992 1991 ------- ------- ------- Cash paid for Interest, net of amounts capitalized $20,395 $22,884 $21,564 Income taxes 41,391 44,884 42,030
Major Customer Information - --------------------------
Operating revenues from American Telephone & Telegraph resulting primarily from network access, billing and collection services, and the lease of network facilities aggregated approximately $105,225,000, $101,418,000 and $97,679,000 for 1993, 1992 and 1991, respectively.
9. SUPPLEMENTAL QUARTERLY INFORMATION - UNAUDITED (in thousands)
1993 Quarters Ended ------------------------------------------------ March 31 June 30 September 30 December 31 -------- -------- ------------ ----------- Operating revenues $152,282 $159,756 $163,536 $162,967 Operating income (loss) (1,869) 23,895 28,038 20,684 Income (loss) before extraordinary item (7,464) 18,436 23,147 15,367 Net income (loss) (7,464) 17,070 22,195 15,367
1992 Quarters Ended ------------------------------------------------ March 31 June 30 September 30 December 31 -------- -------- ------------ ----------- Operating revenues $137,608 $146,034 $149,770 $157,028 Operating income 25,058 28,027 25,785 14,863 Net income 19,749 22,905 20,782 9,364
Nonrecurring charges associated with the transaction costs of the Sprint/Centel merger and the estimated expenses of integrating and restructuring the operations of the two companies were recorded during 1993. The portion of such charges attributable to the Company was $41,700,000 and $4,682,000 in the first and fourth quarters of 1993, respectively, which reduced net income by approximately $25,346,000 and $2,419,000, respectively.
The Company recorded additional depreciation expense of approximately $19,365,000 during the fourth quarter of 1992 as the result of depreciation rate changes granted by the Commission. The effect of this adjustment on 1992 fourth quarter net income was $11,245,000.
Carolina Telephone & Telegraph Company Form 10-K Part II/III/IV
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and - ------- Financial Disclosure
None
Item 10.
Item 10. Directors and Executive Officers of the Registrant - --------
Omitted under the provisions of General Instruction J.
Item 11.
Item 11. Executive Compensation - --------
Omitted under the provisions of General Instruction J.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management - --------
Omitted under the provisions of General Instruction J.
Item 13.
Item 13. Certain Relationships and Related Transactions - --------
Omitted under the provisions of General Instruction J.
Item 14.
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K - --------
(a) 1. The consolidated financial statements of the Company filed as part of this report are listed in the Index to Consolidated Financial Statements on page 10.
2. The consolidated financial statement schedules of the Company filed as part of this report are listed in the Index to Consolidated Financial Statement Schedules on page 32.
(b) The Registrant was not required to file a report on Form 8-K during the last quarter of 1993.
(c) The exhibits filed as part of this report are listed in the Index to Exhibits on pages 42 - 44.
Carolina Telephone & Telegraph Company Form 10-K Part IV
CAROLINA TELEPHONE AND TELEGRAPH COMPANY INDEX TO CONSOLIDATED FINANCIAL STATEMENT SCHEDULES (ITEM 14(a)2.)
Page For each of the three years in the period ended December 31, 1993: Reference - ------------------------------------------------------------------ ---------
Schedule V - Property, Plant and Equipment - Consolidated Pages 33-35 Schedule VI - Accumulated Depreciation on Property, Plant and Equipment - Consolidated Pages 36-38 Schedule VIII - Valuation and Qualifying Accounts - Consolidated Page 39 Schedule IX - Short-Term Borrowings - Consolidated Page 40 Schedule X - Supplementary Income Statement Information - Consolidated Page 41
All other schedules have been omitted since the required information is not present or is not present in amounts sufficient to require submission of the schedule, or because the information required is included in the consolidated financial statements, including the notes thereto.
Carolina Telephone and Telegraph Company Form 10-K Part IV
SCHEDULE V - PROPERTY, PLANT AND EQUIPMENT - CONSOLIDATED
Year Ended December 31, 1993
(In Thousands)
Balance Retirements Balance beginning Additions or end of year at cost sales of year ---------- ----------- ----------- ----------
Land and buildings $ 120,560 $ 8,619 $ 544 $ 128,635
Other general support assets 65,424 12,853 5,897 72,380
Central office assets 562,672 67,120 28,746 601,046
Information origination/ termination assets 44,301 7,727 5,749 46,279
Cable and wire facilities assets 689,171 44,314 9,862 723,623
Amortizable assets 4,431 355 222 4,564
Property held for future use 310 - - 310
Telephone plant under construction 11,673 5,555 - 17,228
Telephone plant acquisition adjustment 342 - - 342
Nonoperating plant 859 - - 859 ---------- -------- -------- ----------
$1,499,743 $146,543 $51,020 $1,595,266 ========== ======== ======== ==========
Depreciation expense is computed on a straight-line basis. The average annual composite depreciation rate in 1993 was 7.5%.
Carolina Telephone and Telegraph Company Form 10-K Part IV
SCHEDULE V - PROPERTY, PLANT AND EQUIPMENT - CONSOLIDATED
Year Ended December 31, 1992
(In Thousands)
Balance Retirements Balance beginning Additions or end of year at cost sales of year ---------- ---------- ---------- ----------
Land and buildings $ 92,700 $ 28,394 $ 534 $ 120,560
Other general support assets 59,841 10,911 5,328 65,424
Central office assets 524,038 67,512 28,878 562,672
Information origination/ termination assets 84,180 5,265 45,144 44,301
Cable and wire facilities assets 655,864 42,176 8,869 689,171
Amortizable assets 4,696 161 426 4,431
Property held for future use 376 (66) - 310
Telephone plant under construction 22,969 (11,296) - 11,673
Telephone plant acquisition adjustment 342 - - 342
Nonoperating plant 859 - - 859 ---------- -------- ------- ----------
$1,445,865 $143,057 $89,179 $1,499,743 ========== ======== ======= ==========
Depreciation expense is computed on a straight-line basis. The average annual composite depreciation rate in 1992 was 7.6%.
Carolina Telephone and Telegraph Company Form 10-K Part IV
SCHEDULE V - PROPERTY, PLANT AND EQUIPMENT - CONSOLIDATED
Year Ended December 31, 1991
(In Thousands)
Balance Retirements Balance beginning Additions or end of year at cost sales of year ---------- ------------ ----------- -----------
Land and buildings $ 86,427 $ 7,078 $ 805 $ 92,700
Other general support assets 55,839 8,831 4,829 59,841
Central office assets 493,218 60,232 29,412 524,038
Information origination/ termination assets 83,571 5,287 4,678 84,180
Cable and wire facilities assets 628,570 37,097 9,803 655,864
Amortizable assets 4,845 90 239 4,696
Property held for future use 1,396 (1,020) - 376
Telephone plant under construction 9,994 12,975 - 22,969
Telephone plant acquisition adjustment 520 (178) - 342
Nonoperating plant 919 (60) - 859 ---------- -------- ------- ----------
$1,365,299 $130,332 $49,766 $1,445,865 ========== ======== ======= ==========
Depreciation expense is computed on a straight-line basis. The average annual composite depreciation rate in 1991 was 6.2%.
Carolina Telephone and Telegraph Company Form 10-K Part IV
SCHEDULE VI - ACCUMULATED DEPRECIATION ON PROPERTY, PLANT AND EQUIPMENT - CONSOLIDATED
Year Ended December 31, 1993
(In Thousands)
Balance Charged to Retirements Balance beginning depreciation Net or end of year expense salvage sales of year --------- ---------- --------- ----------- --------
Buildings $ 27,126 $ 4,154 $ (263) $ 517 $ 30,500
Other general support assets 26,930 8,027 693 5,968 29,682
Central office assets 174,863 54,081 29 28,746 200,227
Information origination/ termination assets 31,000 3,701 637 5,686 29,652
Cable and wire facilities assets 348,091 44,449 (1,600) 9,803 381,137
Amortizable assets 1,422 310 (5) 300 1,427
Property held for future use 25 10 - - 35
Telephone plant acquisition adjustment 487 33 - - 520
Nonoperating plant 659 - - - 659 -------- -------- -------- ------- --------
$610,603 $114,765 $ (509) $51,020 $673,839 ======== ======== ======== ======= ========
Carolina Telephone and Telegraph Company Form 10-K Part IV
SCHEDULE VI - ACCUMULATED DEPRECIATION ON PROPERTY, PLANT AND EQUIPMENT - CONSOLIDATED
Year Ended December 31, 1992
(In Thousands)
Balance Charged to Retirements Balance beginning depreciation Net or end of year expense salvage sales of year -------- ------------ -------- --------- --------
Buildings $ 24,632 $ 3,232 $ (204) $ 534 $ 27,126
Other general support assets 24,366 7,347 544 5,327 26,930
Central office assets 151,089 53,136 (483) 28,879 174,863
Information origination/ termination assets 72,007 3,489 648 45,144 31,000
Cable and wire facilities assets 315,768 42,363 (1,171) 8,869 348,091
Amortizable assets 1,526 255 67 426 1,422
Property held for future use 15 10 - - 25
Telephone plant acquisition adjustment 454 33 - - 487
Nonoperating plant 659 - - - 659 -------- -------- -------- ------- --------
$590,516 $109,865 $ (599) $89,179 $610,603 ======== ======== ======== ======= ========
Carolina Telephone and Telegraph Company Form 10-K Part IV
SCHEDULE VI - ACCUMULATED DEPRECIATION ON PROPERTY, PLANT AND EQUIPMENT - CONSOLIDATED
Year Ended December 31, 1991
(In Thousands)
Balance Charged to Retirements Balance beginning depreciation Net or end of year expense salvage sales of year -------- ------------ ------- ----------- -------
Buildings $ 23,384 $ 2,107 $ (99) $ 760 $ 24,632
Other general support assets 23,494 5,426 275 4,829 24,366
Central office assets 140,203 40,979 (912) 29,181 151,089
Information origination/ termination assets 73,119 2,663 1,180 4,955 72,007
Cable and wire facilities assets 283,716 42,820 (965) 9,803 315,768
Amortizable assets 1,476 250 38 238 1,526
Property held for future use - 10 5 - 15
Telephone plant acquisition adjustment 421 33 - - 454
Nonoperating plant 659 - - - 659 -------- ------- ------- ------- --------
$546,472 $94,288 $ (478) $49,766 $590,516 ======== ======= ======= ======= ========
Carolina Telephone and Telegraph Company Form 10-K Part IV
SCHEDULE VIII - VALUATION AND QUALIFYING ACCOUNTS - CONSOLIDATED
Years Ended December 31, 1993, 1992 and 1991
(In Thousands)
Deductions ----------- Additions Accounts Balance at ---------- charged off Balance beginning Charged to net of at end of year expense collections of year ---------- ---------- ----------- ------- Year ended December 31, 1993 - ---------------------------- Deducted from assets: Allowance for uncollectible accounts $1,415 $1,965 $1,485 $1,895 ====== ====== ====== ======
Year ended December 31, 1992 - ---------------------------- Deducted from assets: Allowance for uncollectible accounts $1,319 $1,613 $1,517 $1,415 ====== ====== ====== ======
Year ended December 31, 1991 - ---------------------------- Deducted from assets: Allowance for uncollectible accounts $1,478 $1,816 $1,975 $1,319 ====== ====== ====== ======
Carolina Telephone and Telegraph Company Form 10-K Part IV
SCHEDULE IX - SHORT-TERM BORROWINGS - CONSOLIDATED
Years Ended December 31, 1993, 1992 and 1991
(In Thousands)
1993 1992 1991 Commercial Commercial Commercial Paper Paper Paper ---------- ---------- ----------
Amount outstanding at end of year $41,100 $55,500 $30,000 ======= ======= =======
Maximum amount outstanding at any month end $59,900 $55,500 $30,000 ======= ======= =======
Approximate average amount outstanding during the year $46,764 $30,129 $24,930 ======= ======= =======
Approximate weighted average interest rate for the year (computed by dividing the annual interest expense by the average debt outstanding during the year) 3.24% 4.17% 6.06% ======= ======= =======
Average interest rate at end of year 3.37% 4.12% 5.31% ======= ======= =======
Commercial paper is generally carried for periods ranging from 15 days to 30 days.
Carolina Telephone and Telegraph Company Form 10-K Part IV
SCHEDULE X - SUPPLEMENTARY INCOME STATEMENT INFORMATION - CONSOLIDATED
Years Ended December 31, 1993, 1992 and 1991
(In Thousands)
Year ended December 31, --------------------------- 1993 1992 1991 ------- ------- ------- Taxes other than payroll and income taxes:
Gross receipts taxes $ 7,009 $ 6,562 $ 6,031
Property taxes 8,484 8,054 8,080
Other state and local taxes 704 1,138 1,381 ------- ------- -------
$16,197 $15,754 $15,492 ======= ======= =======
Maintenance expense is the primary component of plant expense which is shown separately in the Consolidated Statement of Income.
The Company had no significant advertising expense and paid no royalties during 1993, 1992 and 1991.
Carolina Telephone and Telegraph Company Form 10-K Part IV
INDEX TO EXHIBITS
ITEM 14(c)
Exhibit No. 3 Articles of incorporation and by-laws (filed as Exhibit 3 to 1980 Annual Report Form 10-K and incorporated herein by reference).
4 Instruments defining the rights of security holders, including indentures, contained in documents previously filed with the Commission are incorporated herein by reference.
4(A) Indenture dated as of February 1, 1963, from the Company to Bankers Trust Company, Trustee (See Current Report Form 8-K for February 1963, Exhibit 4-F).
4(B) Indenture dated as of March 1, 1965, from the Company to Bankers Trust Company, Trustee (See Current Report Form 8-K for March 1965, Exhibit A).
4(C) Indenture dated as of March 1, 1966, from the Company to Bankers Trust Company, Trustee (See Current Report Form 8-K for March 1966, Exhibit A).
4(D) Indenture dated as of January 15, 1968, from the Company to North Carolina National Bank as Trustee (See Registration No. 2-27816, Exhibit 4-J).
4(E) Indenture dated as of October 1, 1970, from the Company to Bankers Trust Company, as Trustee (See Registration NO. 2- 38292, Exhibit 4-J).
4(F) Supplemental Indenture from the Company to Bankers Trust Company dated as of March 28, 1969 supplementing Indenture dated as of July 1, 1948 (See Registration No. 2-34018, Exhibit 4-K).
4(G) Supplemental Indenture from the Company to Bankers Trust Company dated as of March 28, 1969 supplementing Indenture dated as of August 1, 1952 (See Registration No. 2-34018, Exhibit 4-L).
4(H) Supplemental Indenture from the Company to Bankers Trust Company dated as of March 28, 1969 supplementing Indenture dated as of August 1, 1957 (See Registration No. 2-34018, Exhibit 4-M).
Carolina Telephone & Telegraph Company Form 10-K Part IV
INDEX TO EXHIBITS (CONTINUED) ITEM 14(c)
Exhibit No. 4(I) Supplemental Indenture from the Company to Bankers Trust Company dated as of March 28, 1969 supplementing Indenture dated as of February 1, 1963 (See Registration No. 2- 34018, Exhibit 4-N).
4(J) Supplemental Indenture from the Company to Bankers Trust Company dated as of March 28, 1969 supplementing Indenture dated as of March 1, 1965 (See Registration No. 2-34018, Exhibit 4-O).
4(K) Supplemental Indenture from the Company to Bankers Trust Company dated as of March 28, 1969 supplementing Indenture dated as of March 1, 1966 (See Registration No. 2-34018, Exhibit 4-P).
4(L) Supplemental Indenture from the Company to North Carolina National Bank dated as of March 28, 1969 supplementing Indenture dated as of January 15, 1968 (See Registration No. 2-34018, Exhibit 4-Q).
4(M) Indenture dated as of August 1, 1969 from the Company to Bankers Trust Company (See Registration No. 2-34018, Exhibit 4-A).
4(N) Indenture dated as of October 1, 1971 from the Company to Bankers Trust Company (See Registration No. 2-41721, Exhibit 2-A).
4(O) Indenture dated as of November 1, 1973 from the Company to Bankers Trust Company (See Registration No. 2-49251, Exhibit 2-A).
4(P) Indenture dated as of May 1, 1978 from the Company to Bankers Trust Company (See Registration No. 2-61151, Exhibit 2-A).
4(Q) Indenture dated as of October 26, 1978 from the Company to Bankers Trust Company (See Administrative Proceeding File No. 3-5541, Exhibit 5).
4(R) Indenture dated as of December 27, 1979 from the Company to Bankers Trust Company (See the Company's Application, File Nos. 2-34018, 2-38292, 2-41721, 2-49251 and 2-61151, Exhibit 5).
Carolina Telephone & Telegraph Company Form 10-K Part IV
INDEX TO EXHIBITS (CONTINUED) ITEM 14(c)
Exhibit No. 4(S) Indenture dated as of May 15, 1986 from the Company to Bankers Trust Company (See Amendment No. 1 to Registration No. 33-5350 Exhibit 4-A).
4(T) Indenture dated as of December 1, 1992 from the Company to Bankers Trust Company. (See Registration No. 33-54936, Exhibit 4).
4(U) Indenture dated as of August 15, 1993 from the Company to Bankers Trust Company. (See Registration No. 33-64476, Exhibit 4).
10 Incentive Compensation Plan (filed as Exhibit 10(c) (vi) to United Telecommunications, Inc., Registration Statement No. 2-72988 and incorporated herein by reference).
12 Computation of Ratio of Earnings to Fixed Charges.
23 Consent of Ernst & Young.
Carolina Telephone & Telegraph Company Form 10-K Part IV
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 AND TELEGRAPH COMPANY
Date: March 9, 1994 By s/ F. E. Westmeyer --------------- ----------------------------------------- F. E. Westmeyer, Vice President-Finance
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 and on the dates indicated.
Date Signature and Title ---- -------------------
March 9, 1994 s/ W. E. McDonald - -------------- -------------------------------------------- W. E. McDonald, President, Director and Chief Executive Officer
March 9, 1994 s/ F. E. Westmeyer - -------------- -------------------------------------------- F. E. Westmeyer, Vice President-Finance
March 9, 1994 s/ T. J. Geller - -------------- -------------------------------------------- T. J. Geller, Controller
March 9, 1994 s/ F. J. Boling - -------------- -------------------------------------------- F. J. Boling, Jr, Director
March 9, 1994 s/ T. G. Crewe - -------------- -------------------------------------------- T. G. Crewe, Jr, Director
March 9, 1994 s/ E. I. Davis - -------------- -------------------------------------------- E. I. Davis, Director
March 9, 1994 s/ N. B. DeFriece - -------------- -------------------------------------------- N. B. DeFriece, Director
March 9, 1994 s/ C. D. Evans - -------------- -------------------------------------------- C. D. Evans, Director
Carolina Telephone & Telegraph Company Form 10-K Part IV
SIGNATURES (CONTINUED)
Date Signature and Title ---- -------------------
March 9, 1994 s/ J. A. Hackney, III - -------------- -------------------------------------------- J. A. Hackney, III, Director
March 9, 1994 s/ W. P. Hendricks - -------------- -------------------------------------------- W. P. Hendricks, Director
March 9, 1994 s/ J. W. Jones, Jr - -------------- -------------------------------------------- J. W. Jones, Jr, Director
March 9, 1994 s/ J. A. Laughery - -------------- -------------------------------------------- J. A. Laughery, Director
March 9, 1994 s/ G. W. Little - -------------- -------------------------------------------- G. W. Little, Director
March 9, 1994 s/ B. R. McCain - -------------- -------------------------------------------- B. R. McCain, Director
March 9, 1994 s/ J. M. Mead - -------------- -------------------------------------------- J. M. Mead, Director
- -------------- -------------------------------------------- M. K. Norris, Director
March 9, 1994 s/ D. W. Peterson - -------------- -------------------------------------------- D. W. Peterson, Director
- -------------- -------------------------------------------- J. J. Powell, Director
March 9, 1994 - -------------- -------------------------------------------- D. L. Ward, Jr, Director