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, as well as its wholly-owned subsidiaries, Carolina Telephone Long Distance, Inc., SC One Company and Joint Underground Locating Services, Inc.
The Company is engaged in the business of furnishing communications services, mainly local and long distance services and network access, and selling telecommunications equipment. The Company serves 144 exchange areas in all or part of 50 counties generally in the eastern portion of North Carolina. As of December 31, 1996, the Company had an investment in property, plant and equipment of $876,626,000, net of accumulated depreciation. Operating revenues for the year 1996 amounted to $837,657,000.
The principal industries in the Company's service area are agriculture, textiles, chemicals 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 optic cable represent a substantial portion of the Company's expansion of long distance facilities. At December 31, 1996, the Company served 1,043,356 access lines, distributed among 144 exchange areas as follows: Fayetteville, 14.6 percent; Greenville, 5.5 percent; Rocky Mount, 4.5 percent; Jacksonville, 4.2 percent; Wilson, 3.1 percent; New Bern, 3.0 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 communications services, principally telephone service, constitute about 77.2 percent of the total 1996 operating revenues of the Company. A significant portion of the Company's network access revenues are derived from access charge billings to AT&T Corporation (AT&T). However, the Company does not believe its revenues are dependent upon AT&T, as customers' demand for interLATA long distance telephone service is not tied to any one long distance carrier. As the market share of AT&T's long distance
				 Carolina Telephone & Telegraph Company 							 Form 10-K Part I
Item 1. Business (continued)
competitors increases, the percent of revenues derived from network access services provided to AT&T decreases. 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.
The following tables show certain information regarding access lines in service and toll messages handled for the periods indicated.
			 Access Lines 						 Change 	 Number at End of Period During Period Period Residence Business Total Number % Change - ------ --------- -------- ----- ------ -------- 1996 792,173 251,183 1,043,356 51,310 5.2 1995 763,923 228,123 992,046 44,081 4.7 1994 738,815 209,150 947,965 42,431 4.7 1993 710,977 194,557 905,534 42,693 4.9 1992 681,167 181,674 862,841 36,343 4.4
			 Toll Messages 	 Total For Year Average Messages Per Day Period Number % Change Number % Change - ------ ------ -------- ------ -------- 1996 560,193,027 4.5 1,534,775 4.5 1995 536,211,752 11.7 1,469,073 11.7 1994 480,122,986 5.9 1,315,405 5.9 1993 453,494,308 6.9 1,242,450 7.2 1992 424,096,621 8.8 1,158,734 8.5
On December 31, 1996, the Company had 3,739 employees, of which 2,026 or 54.2 percent were represented by the Communications Workers of America, and 118 or 3.2 percent were represented by the International Brotherhood of Electrical Workers for collective bargaining purposes. The Company had no material work stoppages caused by labor controversies.
The Company's environmental compliance and remediation expenditures are primarily related to the operation of standby power generators. The expenditures arise in connection with permits, standards compliance or occasional remediation associated with generators, batteries or fuel storage. The Company's expenditures relating to environmental compliance and remediation have had no significant effect upon capital expenditures or earnings of the Company, and future effects are not expected to be material.
Carolina Telephone Long Distance, Inc. (CTLD) is a North Carolina corporation formed in 1987. In 1987, the North Carolina Utilities Commission granted CTLD a certificate for the provision of services. In February 1997, CTLD filed with the North Carolina Utilities Commission its notice of intention to cease providing all but nonswitched, private line services effective April 30, 1997.
				 Carolina Telephone & Telegraph Company 							 Form 10-K Part I
Item 1. Business (continued)
The Company is subject to the jurisdiction of the Federal Communications Commission (FCC) and the North Carolina Utilities Commission (Commission).
Effective January 1, 1991, the FCC adopted a price cap regulatory format for the Regional Bell Operating Companies and the GTE local exchange companies. Other local exchange companies (LECs) could voluntarily become subject to price cap 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 cap regulation. During 1995, the FCC adopted modifications to the price cap plan to reset productivity elections, change certain rate adjustment methods, address new service offerings and generally reduce regulatory requirements. Under these changes, the Company elected a productivity factor that allows it to avoid sharing of interstate access earnings. On December 24, 1996, the FCC issued a Notice of Proposed Rule Making relative to Access Charge Reform. The FCC is seeking to make the access charge system more economically efficient and more consistent with the development of local competition in the telecommunications industry.
Effective July 1, 1995, the North Carolina General Assembly enacted legislation that enabled incumbent local exchange telephone companies such as the Company to elect to have its intrastate rates, terms and conditions for services determined pursuant to a price cap form of regulation. The Company filed a petition in October 1995 to elect price regulation, and the Commission approved a price regulation plan effective June 24, 1996. The approved plan required $30 million in rate reductions with $15 million scheduled on the effective date of the plan and the remaining $15 million to occur in $5 million increments on each of the next three anniversary dates of the plan. Rate reductions are targeted for touchtone, access, intraLATA toll and complex business services. The price regulation will allow the Company to adjust prices for basic, interconnection and non-basic services, using an inflation- based formula. As a consumer safeguard, the Company will cap residential rates at its June 24, 1996 level for the initial three years of the plan.
The enactment of the federal Telecommunications Act of 1996 (the Act) will enable direct competition in the Company's local exchange service market. The potential for immediate competition is increasing with eleven competitive carriers certificated (as of January 16, 1997) to provide services statewide. An important issue to be addressed by the Commission in 1997 will be the continuance of universally available telephone service at reasonable rates. The Commission will defer action until the FCC issues its final order on May 8, 1997 regarding universal service issues set forth in the Act. The creation of an explicit universal service fund will enable the Company to more closely align its rates for competitive services (e.g., access services, intraLATA toll services and complex business services) with the cost to provide these services.
The extent and ultimate impact of competition for LECs will continue to depend, to a considerable degree, on FCC and Commission actions, court decisions and possible federal or state legislation. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" for a discussion of the Act.
				 Carolina Telephone & Telegraph Company 							 Form 10-K Parts I/II
Item 2.
Item 2. Properties
The properties of the Company consist principally of land, structures, facilities and equipment. Central office equipment represents approximately 41.3 percent of the Company's investment in telephone plant in service; land and buildings (occupied principally by central office equipment) represent 7.3 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 1.6 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 43.9 percent; and other telephone plant represents 5.9 percent. Of the 144 exchanges, 140 exchanges have central offices located on land owned by the Company and served 84.5 percent of the Company's access lines; 3 exchanges have central offices located in leased facilities and served 0.9 percent of the Company's access lines; and 1 exchange (Fayetteville) has central offices, some of which are located on land owned by the Company and some of which are located in leased facilities, and served an aggregate of 14.6 percent of the Company's access lines.
Standard practices prevailing in the telephone industry are followed by the Company in the construction and maintenance of its plant and facilities; 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 (in thousands):
			 Gross 			 Additions Retirements 			 --------- ----------- 	 1996 $158,586 $43,833 	 1995 146,146 49,211 	 1994 146,110 39,761 	 1993 146,543 51,020 	 1992 143,057 89,179
Item 3.
Item 3. Legal Proceedings
No material legal proceedings are pending to which the Company or its subsidiaries are 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
Omitted under the provisions of General Instruction I.
Item 5.
Item 5. Market for 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.
				 Carolina Telephone & Telegraph Company 							 Form 10-K Part II
Item 6.
Item 6. Selected Financial Data (in thousands) 		 					 December 31, 			 1996 1995 1994 1993 1992 		 ------------------------------------------------------ Operating revenues $ 837,657 $ 769,464 $ 717,454 $ 638,541 $ 590,440
Net income (1)(2) 114,093 57,508 94,944 47,168 72,800
Total assets 1,118,044 1,052,378 1,138,522 1,078,929 1,025,295
Long term debt (excluding current maturities) 198,631 248,309 260,736 269,087 240,535
(1) In 1995, the Company initiated a restructuring in an effort to stream- line certain processes and reduce costs in an increasingly competitive marketplace. As a result, the Company recorded an $8,079,000 nonrecuring charge in 1995, which reduced net income by $4,844,000.
(2) Effective December 31, 1995, the Company determined that it no longer met the criteria necessary for the continued application of the provisions of Statement of Financial Accounting Standards (SFAS) No. 71, "Accounting for the Effects of Certain Types of Regulation." As a result of the decision to discontinue the application of SFAS No. 71, the Company recorded a noncash extraordinary charge of $42,424,000, net of income tax benefits of $51,523,000.
Earnings and dividends per share information have been omitted because the Company is a wholly-owned subsidiary of Sprint.
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and 	 Results of Operations
The Company's financial well-being plays a vital role in its efforts to provide efficient, responsive, state-of-the art communication services to the rapidly growing North Carolina market amid the uncertainties created by deregulation. In order to meet the challenges of this dynamic environment, the Company continues to seek ways to increase organizational efficiency through process improvements and careful control of construction expenditures and automation and consolidation of functions. Concurrently, efforts have been undertaken to aggressively implement new technologies, including enhanced digital switching, fiber optics and pair gain devices that offer expanded services at reduced costs.
The Company includes certain estimates, projections, and other forward- looking statements in its reports, presentations and other material disseminated to the public. There can be no assurance of future performance and actual results may differ materially from those in the forward-looking statements. Factors that could cause actual results to differ materially
				 Carolina Telephone & Telegraph Company 							 Form 10-K Part II
Item 7. Management's Discussion and Analysis of Financial Condition and 	 Results of Operations (continued)
from estimates or projections contained in the forward-looking statements include: * the effects of vigorous competition in the markets in which the Company operates; * the impacts of any unusual items resulting from ongoing evaluations of the Company's business strategies; * requirements imposed on the Company and its competitors by the Federal Communications Commission and North Carolina Utilities Commission under the Telecommunications Act of 1996; * unexpected results of litigation filed against the Company; and * the possibility of one or more of the markets in which the Company competes being affected by variations in political, economic or other factors such as monetary policy, legal and regulatory changes or other external factors over which the Company has no control.
Telecommunications Law - ---------------------- The Telecommunications Act of 1996 (the Act), which was signed into law in February 1996, promotes competition in all aspects of telecommunications. In particular, the Act removes barriers to competition that will enable local and long distance companies and cable TV companies to enter each other's markets. The FCC is in the process of adopting several new rules, as required by the Act, to implement telecommunications competition.
The Act eliminates regulatory barriers to entry into local telephone markets and imposes several obligations upon incumbent LECs. They must allow local resale without unreasonable restrictions, provide number portability and dialing parity, afford access to rights-of-way, establish reciprocal compensation arrangements, negotiate interconnection agreements, provide nondiscriminatory access to unbundled network elements and allow collocation of interconnection equipment by competitors.
The impact of the Act on the Company is unknown because a number of important implementation issues (such as the nature and extent of continued subsidies for local rates) still need to be decided by state or federal regulators. However, the Act offers opportunities as well as risks. The new competitive environment should lead to a reduction in local access fees, the largest single cost in providing long distance service today. The risk aspect of local competition is that the market share of the Company is likely to decline.
Results of Operations - --------------------- Operating revenues are classified as local service, network access, long distance, telecommunications equipment sales and other. 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 entirely by the Company. Long distance revenues are derived
				 Carolina Telephone & Telegraph Company 							 Form 10-K Part II
Item 7. Management's Discussion and Analysis of Financial Condition and 	 Results of Operations (continued)
Results of Operations (continued) - --------------------------------- principally from providing long distance services within designated areas. Telecommunications equipment revenues relate to equipment sales. Other revenues primarily relate to directory advertising, billing and collection services for interexchange long distance carriers, operator services and network facilities leases.
Operating revenues increased by $68,193,000 or 8.9 percent during the year ended December 31, 1996 as compared to 1995, reflecting increases in local service, network access service, telecommunications equipment sales and other revenues.
Local service revenues increased $48,990,000 or 16.2 percent during the year ended December 31, 1996 as compared to 1995. Basic area service revenues contributed $35,425,000 to this increase, primarily attributable to a 5.2 percent growth in access lines during 1996 and to the implementation of Expanded Local Calling Service (ELCS). ELCS, which includes exchanges within an approximately 40-mile radius of a central office, allows residence customers to choose one of three local service options and business customers to choose one of two local service options that best fits their personal calling needs. For the same period, revenue from custom calling features increased $13,102,000 as a result of access line gains, marketing promotions and the introduction of the pay-per-use option. Also contributing to the increased local service revenues were higher maintenance revenues related principally to inside wiring and key and PBX systems. Translink, Digilink, and the North Carolina Information Highway project contributed to an increase in local private line revenues. Translink is an interexchange digital channel service which provides access transport between a customer's premises and the local serving office on a channelized basis over a high-capacity digital facility. Digilink is a digital transmission service designed to transmit signals, end to end, over digital facilities routed through central offices. As part of the North Carolina Information Highway project, the Company is providing equipment to the state government to provide link-up capabilities for different schools and institutions.
Network access revenues increased $16,673,000 or 7.6 percent during the year ended December 31, 1996 as compared to 1995. The increase was primarily due to a 9.9 percent growth in interstate access minutes, an 8.8 percent growth in intrastate access minutes and a final resolution of contingent interstate revenue liabilities associated with prior years under Price Cap I.
Long distance revenues decreased $34,354,000 or 36.3 percent during the year ended December 31, 1996 as compared to 1995. Carolina Telephone Long Distance, Inc. experienced a 26.5 percent decrease in access lines due to aggressive advertising campaigns of its competitors. The remaining decrease is the result of the implementation of ELCS, which changed the category of this revenue from long distance service revenues to local service revenues.
				 Carolina Telephone & Telegraph Company 						 	 Form 10-K Part II
Item 7. Management's Discussion and Analysis of Financial Condition and 	 Results of Operations (continued)
Results of Operations (continued) - --------------------------------- Telecommunications equipment revenues increased $12,640,000 or 23.8 percent during the year ended December 31, 1996 as compared to 1995. The equipment sales revenue related principally to telephone instruments, PBX, data terminal/communications equipment, structured wiring plans and key systems.
Other revenues increased $24,244,000 or 24.1 percent during the year ended December 31, 1996 as compared to 1995. The increase primarily represents increases in general support asset rent revenue, customer late payment revenue and revenue from North Carolina Utility Services (NCUS) and Joint Underground Locating Services, Inc. (JULS). Regulatory approval was given to the Company to charge customers for late payments in 1996. In September 1996, Sprint contributed JULS to the Company. JULS was previously owned by The United Telephone Company of Pennsylvania, an affiliate of the Company. JULS operates a nonregulated line of business specializing in locating underground utility lines serving the following 13 states: Indiana, Minnesota, Massachusetts, Missouri, Nebraska, New Hampshire, New Jersey, New York, Ohio, Oklahoma, Pennsylvania, Texas and Wyoming. JULS and NCUS, another nonregulated line of business specializing in locating underground utility lines, contributed $15,748,000 to the increase in other revenues in 1996. The increase in JULS and NCUS revenues reflects an expansion of the service and an increase in the customer base in existing service areas as well as revenues attributable to administering the placement of buried service wires.
Plant expense increased $11,940,000 or 5.7 percent during the year ended December 31, 1996 as compared to 1995. The increase is primarily due to repair expenses incurred from ice storms and Hurricanes Bertha and Fran. Also contributing to the increase are expenses for a new automated outside plant mapping and facilities management system.
Customer operations expense increased $26,247,000 or 21.6 percent during the year ended December 31, 1996 as compared to 1995. JULS and NCUS expenses contributed $11,295,000 to this increase. JULS and NCUS expenses increased due to the expansion of its customer base as well as expenses attributable to administering the placement of buried service wires. Customer operations- marketing expense increased $4,721,000 primarily due to a more aggressive sales strategy as the Company continues to intensify its efforts to achieve an increased market share and gain knowledge of its customer expectations to differentiate the Company from competition. Business office operations expense increased $4,556,000 primarily due to increased resources utilized to meet customer demands. The remainder of the increase is due to uncollectible accounts and other individually insignificant expenses. An increase in both revenues and the number of accounts being written off due to a more aggressive collection strategy contributed to the increase in uncollectible accounts.
Cost of telecommunications equipment expenses increased $6,747,000 or 17.8 percent during the year ended December 31, 1996 as compared to 1995. This increase is primarily due to an increase in equipment sales.
				 Carolina Telephone & Telegraph Company 							 Form 10-K Part II
Item 7. Management's Discussion and Analysis of Financial Condition and 	 Results of Operations (continued)
Results of Operations (continued) - --------------------------------- In 1995, the Company initiated a restructuring in an effort to streamline certain processes and reduce costs in an increasingly competitive marketplace. These actions resulted in the planned elimination of approximately 150 positions. As a result, the Company recorded an $8,079,000 nonrecurring charge in 1995. The accrued liability related to this charge specifically relates to the benefits that affected employees will receive upon termination. Through 1996, approximately 70 positions have been eliminated resulting in termination benefit payments of $2,521,000. Substantially all of the remaining positions are expected to be eliminated during 1997, with the related costs expected to be paid during 1997 and 1998.
Non-operating Items - -------------------
Other Income
Other income increased $6,275,000 or 72.9 percent during the year ended December 31, 1996 as compared to 1995. In 1995, the Company transferred its investment in Rural Service Area cellular partnerships to its affiliate, Centel Corporation (Centel), in exchange for preferred stock issued by Centel. The increase in other income in 1996 was primarily due to dividends received on the Centel preferred stock.
Extraordinary Items
In 1996, the Company incurred an extraordinary charge related to the early extinguishment of debt of $4,085,000, net of the related income tax benefit.
At December 31, 1995, the Company adopted accounting principles for a competitive marketplace and discontinued applying SFAS No. 71 (see Note 7 of "Notes to Consolidated Financial Statements"). SFAS No. 71 requires accounting recognition of regulators' rate actions where appropriate. The Company determined that it no longer met the criteria for applying SFAS No. 71 due to changes in the regulatory framework and the evolving competitive environment. As a result, the Company recorded an after-tax, noncash extraordinary charge of $42,424,000.
Accounting Changes
Effective January 1, 1994, the Company changed its method of accounting for postemployment benefits by adopting SFAS No. 112. See Note 2 of "Notes to Consolidated Financial Statements" for additional information about this accounting change which did not significantly impact the Company's financial statements.
Inflation - --------- The effects of inflation on the operations of the Company were not significant during 1996, 1995 or 1994.
				 Carolina Telephone & Telegraph Company 							 Form 10-K Part II
Item 7. Management's Discussion and Analysis of Financial Condition and 	 Results of Operations (continued)
Financial Condition - ------------------- The Company's assets increased $65,666,000 to $1.12 billion as of December 31, 1996 compared to December 31, 1995. Customers and other accounts receivable increased $26,629,000 as a result of increased revenues, extended periods for deferred payments and some slowing in rate of customer payments. Property, plant and equipment, net of accumulated depreciation, increased $27,524,000 as the Company must continually replace and construct new facilities. Short-term borrowings increased $94,130,000, primarily due to redemption of debentures prior to scheduled debt maturities. Currently, all short-term borrowing transactions are made with Sprint. Long-term debt (including current maturities of long-term debt) as of December 31, 1996 decreased $61,508,000 compared to December 31, 1995 primarily due to redemption of debentures prior to scheduled debt maturities. Postretirement and other benefit obligations increased $10,916,000 as of December 31, 1996 compared to December 31, 1995, primarily due to the current year's postretirement benefits costs. The Company's total capitalization at December 31, 1996 totaled $851,215,000, consisting of long-term debt (including current maturities), short-term borrowings, and common stock and other stockholder's equity. Short-term borrowings and long-term debt comprised 39.5 percent of total capitalization at December 31, 1996 compared to 38.4 percent at December 31, 1995.
Liquidity and Capital Resources - ------------------------------- Cash flows from operating activities are the Company's primary source of liquidity. Net cash provided by operating activities decreased $17,261,000 during the year ended December 31, 1996. The decrease in net cash provided by operating activities was primarily attributable to increases in accounts receivable, inventories and other current assets, offset by improved operating results.
Net cash used by investing activities increased $11,056,000 during the year ended December 31, 1996. In order to meet customer demands, the Company must continually replace and construct new facilities. The Company's planned construction expenditures for 1997 are $157,635,000 which includes expenditures of $73,052,000 for central office equipment, $43,050,000 for cable facilities, $11,618,000 for general support assets and $29,915,000 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 receives cash advances from Sprint. Net cash used by financing activities decreased $28,639,000 during the year ended December 31, 1996 primarily due to an increase in advances from Sprint, offset by dividend payments and the retirement of long-term debt.
As of December 31, 1996, the Company had a total of $31,000,000 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
				 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) - ------------------------------------------- withdrawn by the banks if there is a material adverse change in the financial condition of Sprint or the Company. As of December 31, 1996, no amounts were borrowed against this credit facility. The Company's short-term financing was provided by Sprint in 1996. The weighted average interest rates on short-term borrowings in 1996, 1995 and 1994 were 5.5 percent, 5.9 percent and 4.6 percent, respectively.
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.
Carolina Telephone Long Distance, Inc. (CTLD) is a North Carolina corporation formed in 1987. In 1987, the North Carolina Utilities Commission (Commission) granted CTLD a certificate for the provision of services. In February 1997, CTLD filed with the Commission its notice of intention to cease providing all but nonswitched, private line services effective April 30, 1997.
				 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 14
Consolidated Balance Sheets as of December 31, 1996 and 1995 Pages 15 -16
Consolidated Statements of Income for each of the three years ended December 31, 1996 Page 17
Consolidated Statements of Changes in Stockholder's Equity for each of the three years ended December 31, 1996 Page 18
Consolidated Statements of Cash Flows for each of the three years ended December 31, 1996 Page 19
Notes to Consolidated Financial Statements Pages 20 - 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 (the Company), a wholly-owned subsidiary of Sprint Corporation, as of December 31, 1996 and 1995, and the related consolidated statements of income, common stock and other stockholder's equity, and cash flows for each of the three years in the period ended December 31, 1996. Our audits also included the financial statement schedule listed in the Index at Item 14(a). These financial statements and the schedule are the responsibility of the Company'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 the Company at December 31, 1996 and 1995, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1996 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, the Company 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 22, 1997
		 CAROLINA TELEPHONE AND TELEGRAPH COMPANY 	 		CONSOLIDATED BALANCE SHEETS 		December 31, 1996 and 1995 			 (In thousands)
							1996 1995 Assets ---- ---- - ------ Current assets Cash $ 414 $ 54 Receivables, net of allowance for doubtful accounts of $3,506 ($2,348 in 1995) Customers and other 107,193 81,710 Interexchange carriers 23,174 25,955 Affiliated companies 8,847 4,920 Inventories 9,118 6,884 Deferred income taxes 3,988 23 Prepaid expenses and other 1,023 1,578 						 --------- --------- 						 153,757 121,124 						 						 Property, plant and equipment 1,939,608 1,818,491 Less accumulated depreciation 1,062,982 969,389 						 ---------- ---------- 						 876,626 849,102 						 						 Deferred charges and other assets Investment in affiliated company 29,043 29,043 Prepaid pension accrual 51,991 43,725 Other 6,627 9,384 			 			 ---------- ---------- 						 87,661 82,152 				 	 ---------- ---------- 				 		 $1,118,044 $1,052,378 		 				 ========== ==========
		 CAROLINA TELEPHONE AND TELEGRAPH COMPANY 		 	 CONSOLIDATED BALANCE SHEETS 			 December 31, 1996 and 1995 			 (In thousands) 			 			 				 			1996 1995 Liabilities and Stockholder's Equity ---- ---- Current liabilities Outstanding checks in excess of cash balances $ 2,956 $ 7,443 Short-term borrowings Commercial paper - 42,800 Advances from parent 137,002 72 Current maturities of long-term debt 842 12,672 Accounts payable Vendors and other 17,993 14,532 Interexchange carriers 18,911 20,389 Affiliated companies 18,902 15,883 Accrued taxes 6,132 14,635 Advance billings and customer deposits 16,869 18,178 Accrued vacation pay 9,021 8,916 Accrued payroll 6,226 5,692 Other 9,627 12,025 						 ---------- ---------- 						 244,481 173,237 						 						 Long-term debt 198,631 248,309
Deferred credits and other liabilities Deferred income taxes 89,513 77,841 Postretirement and other benefit obligations 62,740 51,824 Other 7,939 13,900 						 ---------- ---------- 						 160,192 143,565 						 						 Common stock and other stockholder's equity Common stock, par value $20 per share, authorized-5,000,000 shares, issued and outstanding-3,626,510 shares 72,530 72,530 Capital in excess of par value 75,744 71,991 Retained earnings 366,466 342,746 				 		 ---------- ---------- 						 514,740 487,267 			 			 ---------- ---------- 			 			 $1,118,044 $1,052,378 						
See accompanying notes to consolidated financial statements.
		 CAROLINA TELEPHONE AND TELEGRAPH COMPANY 		 CONSOLIDATED STATEMENTS OF INCOME 		Years ended December 31, 1996, 1995 and 1994 			 (In thousands)
					 1996 1995 1994 					 ---- ---- ---- Operating Revenues Local service $351,218 $302,228 $276,532 Network access service 235,642 218,969 204,928 Long distance service 60,192 94,546 108,688 Telecommunications equipment 65,782 53,142 44,431 Other 124,823 100,579 82,875 					 -------- -------- -------- 					 837,657 769,464 717,454 					 Operating Expenses Plant expense 223,189 211,249 200,608 Depreciation 135,205 132,146 133,764 Customer operations 147,947 121,700 97,094 Corporate operations 71,863 68,514 65,815 Cost of telecommunications equipment 44,595 37,848 31,906 Restructuring costs - 8,079 - Other 19,979 17,675 15,365 					 -------- -------- ------- 			 		 642,778 597,211 544,552 			 	 -------- -------- -------- Operating Income 194,879 172,253 172,902
Interest expense (21,262) (22,413) (22,105)
Other income 14,668 8,602 323 					 -------- -------- -------- Income before income taxes and extraordinary items 188,285 158,442 151,120
Income taxes (70,107) (58,510) (56,176) 	 				 -------- -------- -------- Income before extraordinary items 118,178 99,932 94,944
Extraordinary items Discontinuation of regulatory accounting principles, net - (42,424) - Early extinguishment of debt, net (4,085) - - 					 -------- -------- -------- Net income $114,093 $ 57,508 $ 94,944 					 ======== ======== ========
See accompanying notes to consolidated financial statements.
		 CAROLINA TELEPHONE AND TELEGRAPH COMPANY 	 CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY 		 Years ended December 31, 1996, 1995 and 1994 				(In thousands) 				
					 Capital in 			 	 Common Excess of Retained 				 Stock Par Value Earnings Total 				 ------ ---------- -------- ----- Balance at January 1, 1994 $72,530 $71,991 $305,765 $450,286
Net income - - 94,944 94,944
Cash dividends on common stock - - (31,188) (31,188) 				 ------- ------- -------- -------- Balance at December 31, 1994 72,530 71,991 369,521 514,042
Net income - - 57,508 57,508 					 Cash dividends on common stock - - (84,283) (84,283) 			 ------- ------- -------- -------- Balance at December 31, 1995 72,530 71,991 342,746 487,267
Net income - - 114,093 114,093
Cash dividends on common stock - - (90,373) (90,373)
Contribution of JULS - 3,753 - 3,753 				 ------- ------- -------- -------- Balance at December 31, 1996 $72,530 $75,744 $366,466 $514,740
See accompanying notes to consolidated financial statements.
		 CAROLINA TELEPHONE AND TELEGRAPH COMPANY 		 CONSOLIDATED STATEMENTS OF CASH FLOWS 		 Years ended December 31, 1996, 1995 and 1994 	 			(In Thousands) 		 				1996 1995 1994 Operating Activities ---- ---- ---- Net income $114,093 $57,508 $94,944 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 135,205 132,146 133,764 Deferred income taxes and investment tax credits 9,005 (8,738) (4,936) Extraordinary losses, net 4,085 42,424 - Changes in operating assets and liabilities: Receivables, net (26,629) 1,471 (26,029) Inventories and other current assets (1,679) 8,101 (5,886) Accounts payable, accrued expenses and other current liabilities (11,056) (11,608) (7,599) Noncurrent assets and liabilities, net (4,088) 14,350 9,607 Other, net 1,904 2,447 (69) 	 				 -------- -------- -------- Net cash provided by operating activities 220,840 238,101 193,796
Investing Activities Capital expenditures (158,586) (146,146) (146,110) Other, net (4,143) (5,527) (11,238) 					 -------- -------- -------- Net cash used by investing activities (162,729) (151,673) (157,348)
Financing Activities Retirements of long-term debt (61,508) (8,569) (574) Net increase (decrease) in short-term borrowings (42,800) 9,200 (7,500) Net increase (decrease) in advances from parent company 136,930 (2,738) 2,810 Dividends paid (90,373) (84,283) (31,188) 					 -------- -------- -------- Net cash used by financing activities (57,751) (86,390) (36,452) 					 -------- -------- -------- Increase (Decrease) in Cash 360 38 (4) Cash at Beginning of Year 54 16 20 					 -------- -------- -------- Cash at End of Year $ 414 $ 54 $ 16 ======== ======== ======== Supplemental Cash Flow Information Cash paid for interest, net of amounts capitalized $ 22,046 $ 22,994 $ 22,504 Cash paid for income taxes 66,498 70,714 57,189
Noncash Activities Exchange of investment in affiliated partnership for investment in affiliated preferred stock $ - $ 29,043 $ - See accompanying 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, 1996
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, Carolina Telephone Long Distance, Inc., SC One Company and Joint Underground Locating Services, Inc. (JULS). 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 consolidated financial statements are prepared in conformity with generally accepted accounting principles (GAAP). GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities. Those estimates and assumptions also affect the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Certain amounts previously reported for prior years have been reclassified to conform to the current year presentation in the accompanying consolidated financial statements. These reclassifications had no effect on the results of operations or stockholder's equity as previously reported.
The Company adopted accounting principles for a competitive marketplace and discontinued accounting 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," effective December 31, 1995 (see Note 7).
Operations
The Company provides local exchange services, access by telephone customers and other carriers to local exchange facilities, sales of telecommunications equipment and long distance services in North Carolina.
In September 1996, Sprint contributed JULS to the Company. JULS was previously owned by The United Telephone Company of Pennsylvania, an affiliate of the Company. Although the contribution of JULS to the Company results in a change in reporting entity, prior years' financial statements have not been restated due to the insignificance of its impact to the financial position and operations of the Company. JULS operates a nonregulated line of business specializing in locating underground utility lines serving the following 13 states: Indiana, Minnesota, Massachusetts, Missouri, Nebraska, New Hampshire, New Jersey, New York, Ohio, Oklahoma, Pennsylvania, Texas and Wyoming.
				
				 Carolina Telephone & Telegraph Company 							 Form 10-K Part II
		 CAROLINA TELEPHONE AND TELEGRAPH COMPANY 		 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 			 December 31, 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Revenue Recognition
Service revenues are recognized as communications services are rendered. Sales of telecommunications equipment are recognized upon delivery of products to customers.
Cash
As part of its cash management program, the Company uses controlled disbursement banking arrangements. Outstanding checks in excess of cash balances are reflected as a current liability on the consolidated balance sheets. The Company had sufficient funds available to fund these outstanding checks when they were presented for payment.
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 No. 71 as of December 31, 1995, the cost of property, plant and equipment had been generally depreciated on a straight-line basis over the lives prescribed by regulatory commissions (see Note 7).
Income Taxes
The operations of the Company are included in the consolidated federal income tax return of Sprint. Federal income tax is calculated by the Company on the basis of its filing a separate return.
Deferred income taxes are provided for certain temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for tax purposes (see Note 3).
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.
				 Carolina Telephone & Telegraph Company 							 Form 10-K Part II
		 CAROLINA TELEPHONE AND TELEGRAPH COMPANY 		 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 		 December 31, 1996
2. EMPLOYEE BENEFIT PLANS
Defined Benefit Pension Plan
Substantially all employees of the Company are covered by a noncontributory defined benefit pension plan. 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.
The Company's policy is to make annual contributions to the plan 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 December 31, 1996, the plan's assets consisted principally of investments in corporate equity securities and U.S. government and corporate debt securities.
Pension costs or credits are determined for each subsidiary of Sprint based on a direct 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 the Company were $6,675,000, $7,341,000 and $5,125,000 in 1996, 1995 and 1994, respectively.
Defined Contribution Plans
Sprint sponsors 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 in common stock equal to 50.0% of participants' contributions up to 6.0% of their compensation. In addition, Sprint may, at the discretion of the Board of Directors, provide additional matching contributions based on the performance of Sprint's common stock compared with other telecommunications companies. The Company's matching contributions were $3,909,000, $3,598,000 and $3,258,000 in 1996, 1995 and 1994, respectively.
Postretirement Benefits
Sprint provides postretirement benefit (principally medical benefits) arrangements covering substantially all employees of the Company. Employees retiring before specified dates are eligible for these benefits at no cost or reduced cost. Employees retiring after specified dates are eligible for these benefits on a shared cost basis. The Company funds the accrued costs as benefits are paid.
				 Carolina Telephone & Telegraph Company 							 Form 10-K Part II
		 CAROLINA TELEPHONE AND TELEGRAPH COMPANY 		 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 			 December 31, 1996
2. EMPLOYEE BENEFIT PLANS (continued)
Postretirement Benefits (continued)
Net postretirement benefit costs are determined for each subsidiary of Sprint based on a direct calculation of service costs and accumulated postretirement benefit obligations and an appropriate allocation of unrecognized prior service costs, unrecognized net gains and transition obligation. Net postretirement benefit costs recorded by the Company were $14,498,000, $17,457,000 and $14,121,000 in 1996, 1995 and 1994, respectively.
Postemployment Benefits
Effective January 1, 1994, the Company adopted SFAS No. 112, "Employers' Accounting for Postemployment Benefits." Upon adoption, the Company recognized certain previously unrecorded obligations for benefits being provided to former or inactive employees and their dependents, after employment but before retirement. The resulting charge did not significantly impact the Company's financial statements. Such postemployment benefits offered by the Company include severance, disability and worker's compensation benefits, including the continuation of other benefits such as health care and life insurance coverage.
3. INCOME TAXES
The components of income tax expense are as follows (in thousands):
				 	 1996 1995 1994 					 ---- ---- ---- Current income tax expense Federal $49,780 $54,744 $49,872 State 11,322 12,504 11,240 				 ------- ------- ------- 				 61,102 67,248 61,112
Deferred income tax expense (benefit) Federal 7,234 (5,777) (1,912) State 1,771 (1,023) 632 Amortization of deferred ITC - (1,938) (3,656) 				 ------- ------- ------- 	 				9,005 (8,738) (4,936) 				 ------- ------- ------- Total income tax expense $70,107 $58,510 $56,176 ======= ======= =======
				 Carolina Telephone & Telegraph Company 							 Form 10-K Part II 							 							 		 CAROLINA TELEPHONE AND TELEGRAPH COMPANY 		 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 			 December 31, 1996 			 3. INCOME TAXES (continued)
The differences which cause the effective income tax rate to vary from the statutory federal income tax rate of 35 percent in 1996, 1995 and 1994 are as follows (in thousands): 				 1996 1995 1994 					 ---- --- ---- Federal income tax provision at the statutory rate $ 65,900 $ 55,455 $ 52,892 Less amortization of deferred ITC - 1,938 3,656 				 	 -------- -------- -------- Expected federal income tax provision after amortization of deferred ITC 65,900 53,517 49,236
Effect of Reversal of rate differentials - (862) (972) State income tax, net of federal income tax effect 8,510 7,463 7,717 Other, net (4,303) (1,608) 195 			 	 -------- -------- -------- Income tax provision, including ITC $ 70,107 $ 58,510 $ 56,176 			 ======== ======== ======== Effective income tax rate 37.2% 36.9% 37.2%
The income tax benefits allocated to other items are as follows (in thousands): 			 		 1996 1995 	 				 ---- ---- Extraordinary loss on discontinued use of SFAS No. 71 $ - $51,523 Extraordinary losses on early extinguishments of debt 2,728 -
Deferred income taxes are 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, 1996 and 1995, along with the income tax effect of each, are as follows (in thousands): 			 		 1996 1995 	 			 Deferred Income Tax Deferred Income Tax 				 Assets Liabilities Assets Liabilities 				 ------------------------------------------- Property, plant and equipment $ - $ 96,081 $ - $ 90,520 Postretirement and other benefits 21,227 - 19,807 - Expense accruals 8,187 - 9,407 - Prepaid pension costs - 19,998 - 17,233 Other, net 1,140 - 721 - 			 	 ------- ------- ------- ------- 			 	 $30,554 $116,079 $29,935 $107,753
				 Carolina Telephone & Telegraph Company 							 Form 10-K Part II 							 		 CAROLINA TELEPHONE AND TELEGRAPH COMPANY 	 	 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 			 December 31, 1996 			 4. LONG-TERM DEBT
Long-term debt as of December 31 is as follows (in thousands):
			 Interest Rates 1996 1995 			 -------------- ---- ---- Debentures, maturities 1996 - 2000 4.50% - 6.63% $ 50,825 $ 63,433 2001 - 2005 6.13% - 7.25% 100,000 100,000 2013 - 2016 6.75% - 9.00% 50,000 100,000
Other notes, maturities 1996 - 1998 6.90% - 7.32% 22 87
Unamortized debt discount (1,374) (2,539) 					 ------- ------- 				 		 199,473 260,981 					 Less current maturities 842 12,672 						 ------- ------- Long-term debt $198,631 $248,309
Long-term debt maturities during each of the next five years are as follows (in thousands): 			 Year Amount 			 ---- ------ 			 1997 $ 842 			 1998 5 			 1999 - 			 2000 50,000 			 2001 - 			 As of December 31, 1996, the Company had lines of credit with banks totaling $31,000,000; no borrowings were outstanding. The bank lines, which are renewable in May 1997, provide for short-term borrowings at market rates of interest and require annual commitment fees. Lines of credit may be withdrawn by the banks if there is a material adverse change in the financial condition of Sprint or the Company.
The Company's short-term financing was provided by Sprint in 1996. The weighted average interest rates on short-term borrowings in 1996, 1995 and 1994 were 5.5 percent, 5.9 percent and 4.6 percent, respectively.
The Company is in compliance with all restrictive or financial covenants relating to its debt arrangements at December 31, 1996.
				 Carolina Telephone & Telegraph Company 							 Form 10-K Part II
		 CAROLINA TELEPHONE AND TELEGRAPH COMPANY 		 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 			 December 31, 1996
4. LONG-TERM DEBT (continued)
During 1996, the Company redeemed prior to scheduled maturities $50,000,000 of debentures with an interest rate of 9.0 percent. Prepayment penalties incurred in connection with early extinguishments of debt and the write-off of related debt issuance costs, net of the related income tax benefits, are reflected as an extraordinary loss in the consolidated statements of income.
5. COMMITMENTS AND CONTINGENCIES
Gross rental expense aggregated $6,859,000, $6,171,000 and $4,614,000 in 1996, 1995 and 1994, respectively. Minimum rental commitments as of December 31, 1996 are as follows (in thousands):
		 1997 $646 		 1998 327 		 1999 276 	 2000 206 		 2001 176 		 Thereafter 31
Various lawsuits arising in the ordinary course of business are pending against the Company. Management cannot predict the ultimate outcome of these actions, but believes they will not result in a material effect on the Company's financial statements.
				 Carolina Telephone & Telegraph Company 							 Form 10-K Part II
		 CAROLINA TELEPHONE AND TELEGRAPH COMPANY 	 	 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 			 December 31, 1996
6. RELATED PARTY TRANSACTIONS
Related party transactions of the Company are as follows (in thousands):
Affiliate Company Transaction Description 1996 1995 1994 - ----------------------------------------------------------------------------- 		 The Company: - ----------------------------------------------------------------------------- North Supply Purchased telecommunications, Company construction and maintenance 		 equipment and materials and 		 supplies. $44,653 $42,274 $55,609 - ----------------------------------------------------------------------------- Sprint Reimbursed affiliate for data 		 processing services, other 		 data-related costs and certain 		 management costs. 50,614 51,606 52,119 - ----------------------------------------------------------------------------- Sprint Entered into cash advance and 		 borrowing transactions. 		 Interest expense on advances.(1) 		 		 (1)Interest is computed on the 		 prior month's thirty-day average 		 commercial paper index, as 		 published in the Federal Reserve 		 Statistical Release H.15, plus 		 15 basis points. 3,583 491 - - ----------------------------------------------------------------------------- Sprint Long Provided network access, Distance Division operator, billing and 		 collection services and the 		 lease of network facilities. 23,576 21,715 20,558 - ----------------------------------------------------------------------------- Sprint Long Received interexchange tele- Distance Division communications services. 4,321 8,063 15,669 - ----------------------------------------------------------------------------- Sprint Publishing Received fees for the right to and Advertising publish telephone directories 		 in the Company's territory, 		 listing and billing and 		 collection services. 22,529 22,448 21,607 - ----------------------------------------------------------------------------- Other Sprint Local Received reimbursement for Operating Companies certain salaries and other 		 costs incurred for the benefit 		 of its affiliates (net). 7,546 4,691 690 - -----------------------------------------------------------------------------
				 Carolina Telephone & Telegraph Company 							 Form 10-K Part II
		 CAROLINA TELEPHONE AND TELEGRAPH COMPANY 	 	 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 			 December 31, 1996
6. RELATED PARTY TRANSACTIONS (continued)
Affiliate Company Transaction Description 1996 1995 1994 - ----------------------------------------------------------------------------- 		 The Company: - ----------------------------------------------------------------------------- Sprint Mid-Atlantic Paid management fees for certain Telecom, Inc. salaries and other costs incurred 		 by the management company on 		 behalf of the Company. 72,715 59,153 48,420 - ----------------------------------------------------------------------------- Centel Corporation Received dividends on in- 		 vestment in preferred stock. 14,282 6,632 - - -----------------------------------------------------------------------------
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. 				
7. ADOPTION OF ACCOUNTING PRINCIPLES FOR A COMPETITIVE MARKETPLACE
Effective December 31, 1995, the Company determined that it no longer met the criteria necessary for the continued application of the provisions of SFAS No. 71. As a result of the decision to discontinue the application of SFAS No. 71, the Company recorded a noncash, extraordinary charge of $42,424,000, which is net of an income tax benefit of $51,523,000.
The Company's determination that it was no longer eligible for the continued application of the accounting required by SFAS No. 71 was based on changes in the regulatory framework, which continues to evolve from rate-base regulation to price regulation and the convergence of competition in the telecommunications industry. Based on these occurrences, the Company no longer believed that it could be assured that prices could be maintained at levels which would provide for the recovery of specific costs.
The components of the extraordinary charge recognized due to the discontinued application of SFAS No. 71 are as follows (in thousands):
						 Pre-tax After-tax 						 ------- --------- Increase to the accumulated depreciation balance $ 103,277 $ 61,926 Recognition of switch software asset (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 amortization of investment tax credits (683) 								 -------- Extraordinary charge $ 42,424
				 Carolina Telephone & Telegraph Company 							 Form 10-K Part II
		 CAROLINA TELEPHONE AND TELEGRAPH COMPANY 		 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 			 December 31, 1996
7. ADOPTION OF ACCOUNTING PRINCIPLES FOR A COMPETITIVE MARKETPLACE (continued)
The adjustment to the accumulated depreciation balance was determined by the completion of depreciation reserve and impairment studies. The depreciation reserve study analyzed, by individual plant asset categories, the impacts of regulator-prescribed depreciable asset lives compared with the Company's estimated economic lives. The results identified the cumulative under depreciation of certain asset categories. The impairment study, which validated the results of the depreciation study, estimated the impact on future revenues caused by price changes and developing industry competition and the resulting effects on cash flows.
The discontinued application of SFAS No. 71 also required the Company to eliminate from its consolidated balance sheet the effects of any actions of regulators that had been recognized as assets and liabilities under SFAS No. 71, but would not have been recognized as assets and liabilities by enterprises in general.
The tax-related adjustments were required to adjust deferred income tax amounts to the currently enacted statutory rates and to eliminate tax-related regulatory assets and liabilities. The Company uses the deferral method of accounting for investment tax credits and amortizes the credits as a reduction to tax expense over the life of the asset that gave rise to the tax credit. Since plant asset lives were shortened, the investment tax credits were adjusted to reduce the unamortized balance by a corresponding amount.
8. ADDITIONAL FINANCIAL INFORMATION
Restructuring Charge
In 1995, the Company initiated a restructuring in an effort to streamline ertain processes and reduce costs in an increasingly competitive marketplace. These actions resulted in the planned elimination of approximately 150 positions. As a result, the Company recorded an $8,079,000 nonrecurring charge in 1995. The accrued liability related to this charge specifically relates to the benefits that affected employees will receive upon termination. Through 1996, approximately 70 positions have been eliminated resulting in termination benefit payments of $2,521,000. Substantially all of the remaining positions are expected to be eliminated during 1997, with the related costs expected to be paid during 1997 and 1998.
Major Customer Information
Operating revenues from AT&T Corporation resulting primarily from network access, billing and collection services and the lease of network facilities aggregated $100,952,000, $107,605,000 and $109,074,000 during 1996, 1995 and 1994, respectively.
	 	
				 Carolina Telephone & Telegraph Company 							 Form 10-K Part II
		 CAROLINA TELEPHONE AND TELEGRAPH COMPANY 	 	 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 			 December 31, 1996
8. ADDITIONAL FINANCIAL INFORMATION (continued)
Major Customer Information (continued)
The Company's customer and other accounts receivable are not subject to significant concentration of credit risk due to the large number of customers in the Company's customer base.
The principal industries in the Company's service area include agriculture, textiles, chemicals and tourism. Military installations, including Fort Bragg, Camp Lejeune, Cherry Point Marine Air Corps Station, the U.S. Coast Guard Base in Elizabeth City and Pope Air Force Base contribute significantly to the economy of the area.
Financial Instruments
The Company estimates the fair value of its financial instruments using available market information and appropriate valuation methodologies. Accordingly, the following estimates are not necessarily indicative of the values the Company could realize in a current market exchange. Although management is not aware of any factors that would affect the estimated fair value amounts presented as of December 31, 1996, those amounts have not been comprehensively revalued for purposes of these financial statements since that date. Therefore, estimates of fair values subsequent to that date may differ significantly from the amounts presented below.
The Company's financial instruments primarily consist of long-term debt, including current maturities, with carrying amounts of $199,473,000 and $260,981,000 and estimated fair values of $197,753,000 and $281,173,000 at December 31, 1996 and 1995, respectively. The fair values of the Company's long-term debt are estimated based on quoted market prices for publicly traded issues. The carrying value of the Company's other financial instruments appproximate fair value at December 31, 1996 and 1995.
The Company has not invested in derivative financial instruments.
				 Carolina Telephone & Telegraph Company 						 Form 10-K Parts II/III/IV
		 CAROLINA TELEPHONE AND TELEGRAPH COMPANY 		 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 	 December 31, 1996
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 I.
Item 11.
Item 11. Executive Compensation
	 Omitted under the provisions of General Instruction I.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management
	 Omitted under the provisions of General Instruction I.
Item 13.
Item 13. Certain Relationships and Related Transactions
	 Omitted under the provisions of General Instruction I.
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 13.
2. The consolidated financial statement schedule of the Company 	 filed as part of this report is 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 1996.
(c) The exhibits filed as part of this report are listed in the 	 Index to Exhibits on pages 34 - 36.
				 				
				 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, 1996: Reference 								 ---------
Schedule II - Valuation and Qualifying Accounts - Consolidated Page 33
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 & Telegraph Company 							 Form 10-K Part IV
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS - CONSOLIDATED
	 Years Ended December 31, 1996, 1995 and 1994
			 (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, 1996 - ---------------------------- Deducted from assets: Allowance for uncollectible accounts $2,348 $5,831 $4,673 $3,506
Year ended December 31, 1995 - ---------------------------- Deducted from assets: Allowance for uncollectible accounts $1,775 $3,474 $2,901 $2,348
Year ended December 31, 1994 - ---------------------------- Deducted from assets: Allowance for uncollectible accounts $1,938 $2,371 $2,534 $1,775
				 Carolina Telephone & 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 	 Securities and Exchange 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 February 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).
12 Computation of Ratio of Earnings to Fixed Charges.
23 Consent of Ernst & Young LLP.
27 Financial Data Schedule.
				 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 & TELEGRAPH COMPANY
Date: March 24, 1997 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 24, 1997 s/ W. E. McDonald - -------------- --------------------------------------- 				 W. E. McDonald, President, Director 				 and Chief Executive Officer
March 24, 1997 s/ M. B. Fuller - -------------- --------------------------------------- 			 M. B. Fuller, Director
March 24, 1997 s/ D. A. Jensen - -------------- --------------------------------------- 				 D. A. Jensen, Director