Form 10-Q Part I Wisconsin Bell, Inc.
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 1994
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 1-6589
WISCONSIN BELL, INC.
(Incorporated under the laws of the State of Wisconsin)
722 North Broadway, Milwaukee, Wisconsin 53202
I.R.S. Employer Identification Number 39-0716650
Telephone No. 414-549-7102
THE REGISTRANT, A WHOLLY-OWNED SUBSIDIARY OF AMERITECH CORPORATION, MEETS
THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION H(1)(a) AND (b) OF FORM 10-
Q AND IS THEREFORE FILING THIS FORM WITH REDUCED DISCLOSURE FORMAT PURSUANT
TO GENERAL INSTRUCTION H(2).
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X . No .
At July 31, 1994, 31,960,395 common shares were outstanding.
PART I - FINANCIAL INFORMATION
The following financial statements have been prepared by Wisconsin Bell,
Inc. (the Company") pursuant to the rules and regulations of the Securities
and Exchange Commission ("SEC") and, in the opinion of the Company, include
all adjustments (consisting only of normal recurring adjustments) necessary
for a fair presentation of results of operations, financial position, and
cash flows for each period shown. Certain information and footnote
disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such SEC rules and regulations. The
Company believes that the disclosures made are adequate to make the
information presented not misleading. These financial statements should be
read in conjunction with the financial statements and notes thereto
included in the Company's latest annual report on Form 10-K and Form 10-Q
quarterly report previously filed in the current year.
CONDENSED STATEMENTS OF INCOME AND REINVESTED EARNINGS
(Millions of Dollars)
(Unaudited)
For the 3 Months For the 6 Months
Ended June 30, Ended June 30,
1994 1993 1994 1993
Revenues $280.5 $281.4 $563.7 $554.2
Operating expenses
Depreciation and amortization 48.6 45.6 94.6 91.3
Employee related expenses 61.6 64.0 122.1 127.0
Taxes other than income taxes 15.5 15.3 30.8 30.6
Workforce restructuring - - 53.0 -
Other operating expenses 89.5 94.4 175.2 176.2
215.2 219.3 475.7 425.1
Operating income 65.3 62.1 88.0 129.1
Interest expense 7.2 7.5 13.4 16.5
Other (income) expense, net ( .3) ( .4) ( 1.9) ( .8)
Income before income taxes 58.4 55.0 76.5 113.4
Income taxes 21.0 19.3 27.6 40.1
Net income 37.4 35.7 48.9 73.3
Reinvested earnings, beginning
of period 9.7 15.1 24.9 11.9
Less, dividends 28.5 33.5 55.2 67.9
Reinvested earnings, end of
period $18.6 $17.3 $18.6 $17.3
See Note(s) to Condensed Financial Statements.
CONDENSED BALANCE SHEETS
(Millions of Dollars)
June 30, 1994 Dec. 31, 1993
(Unaudited) (Derived from
ASSETS Audited Financial
Statements)
Current assets:
Cash $ - $ -
Receivables, net
Customers 188.6 179.0
Ameritech and affiliates 2.6 31.2
Other 8.0 12.6
Materials and supplies 6.3 6.4
Prepaid directories 9.7 10.8
Prepaid and other 2.1 21.0
217.3 261.0
Property, plant and equipment 2,759.3 2,724.4
Less, accumulated depreciation 1,128.4 1,066.2
1,630.9 1,658.2
Investments, principally in
affiliates 26.3 27.5
Other assets and deferred charges 71.1 91.6
Total assets $1,945.6 $2,038.3
LIABILITIES AND SHAREOWNER'S EQUITY
Current liabilities:
Debt maturing within one year
- Ameritech $203.8 $237.8
- Other .9 .9
Accounts payable
- Ameritech and affiliates 40.7 27.4
- Other 76.9 109.0
Other current liabilities 73.5 76.9
395.8 452.0
Long-term debt 306.1 306.5
CONDENSED BALANCE SHEETS - Continued
(Millions of Dollars)
June 30, 1994 Dec. 31, 1993
(Unaudited) (Derived from
Audited Financial
Statements)
Deferred credits and other long-term
liabilities:
Accumulated deferred income taxes 165.7 201.6
Unamortized investment tax credits 39.4 42.9
Post-retirement benefits other than
pensions 240.6 225.8
Long-term payable to Ameritech
Services, Inc. affiliate, for
SFAS 106 adoption 8.8 8.8
Other 119.0 124.2
573.5 603.3
Shareowner's equity:
Common shares, $20 per value per share,
31,995,000 shares authorized;
31,960,395 shares issued and
outstanding 639.2 639.2
Proceeds in excess of par value 12.4 12.4
Reinvested earnings 18.6 24.9
670.2 676.5
Total liabilities and shareowner's
equity $1,945.6 $2,038.3
See Note(s) to Condensed Financial Statements.
CONDENSED STATEMENTS OF CASH FLOWS
(Millions of Dollars)
For the 6 Months Ended
June 30, 1994 June 30, 1993
(Unaudited)
Cash flows from operating activities:
Net income $ 48.9 $ 73.3
Adjustments to net income:
Restructuring charge net of tax 31.7 -
Depreciation and amortization 94.6 91.3
Deferred income taxes, net 2.0 6.9
Investment tax credits, net ( 3.5) ( 4.4)
Interest during construction ( .2) ( .2)
Provision for uncollectibles 5.0 4.8
Decrease in accounts receivable 18.6 .2
(Increase) decrease in material and
supplies .1 ( 1.7)
Decrease in prepaid expenses and
certain other current assets 3.3 2.9
Decrease in accounts payable ( 18.8) ( 3.8)
Increase (decrease) in accrued taxes ( 8.5) ( 14.4)
Increase (decrease) in certain other
current liabilities 5.8 ( 4.2)
Net change in other certain noncurrent
assets and liabilities ( 19.0) ( 18.6)
Other 2.6 .2
Net cash from operating activities 156.7 138.2
Cash flows from investing activities:
Capital expenditures, net ( 66.2) ( 69.3)
Proceeds (net of removal costs) from
disposal of property, plant and
equipment ( .8) .3
Net cash from investing activities ( 67.0) ( 69.0)
Cash flows from financing activities:
Intercompany financing, net ( 34.1) 121.7
Retirements of long-term debt ( .4) (120.3)
Call premium on early retirement of
long-term debt - ( 5.1)
Dividend payments ( 55.2) ( 67.9)
Net cash from financing activities ( 89.7) ( 71.6)
Net decrease in cash - ( 2.4)
Cash, beginning of period - 3.1
Cash, end of period $ - $ .7
See Note(s) to Condensed Financial Statements.
NOTES TO CONDENSED FINANCIAL STATEMENTS
June 30, 1994
(Millions of Dollars)
(A)WORK FORCE RESTRUCTURING
On March 25, 1994, the Company's parent (Ameritech Corporation)
announced that it will reduce its nonmanagement work force by 6,000
employees by the end of 1995. Under terms of agreements between the
Company, the Communication Workers of America (CWA) and the
International Brotherhood of Electrical Workers (IBEW), Ameritech
implemented an enhancement to the Ameritech Pension Plan by adding
three years to the age and the net credited service of eligible
nonmanagement employees who leave the business during a designated
period that ends in mid-1995. In addition, certain of the Company's
business units are offering financial incentives under terms of its
current contracts with the CWA and the IBEW to selected nonmanagement
employees who leave the business before the end of 1995.
This program resulted in a first quarter charge of $53.0 or $31.7 after-
tax. This charge reduced the Company's prepaid pension asset by $30.5
for pension enhancements and curtailment losses. The charge also
includes a curtailment loss of $13.1 related to SFAS No. 106
("Employers Accounting for Postretirement Benefits Other than
Pensions") and a severance accrual of $9.4.
In June, Ameritech completed the first phase of its restructuring plan,
having solicited volunteers to leave the Company. The response to date
is exceeding expectations. Ameritech management is in the process of
evaluating the specific job functions and locations of the employees
who have requested to leave under the plan to ensure that service to
customers will not be adversely affected. The task is complex as the
intended 6,000 employee force reduction represents approximately twelve
percent of the nonmanagement work force. Accordingly, insufficient
information currently exists to adjust the restructuring accrual.
Ameritech expects to complete this process in the third quarter and the
Company will increase its restructuring accrual to the appropriate
level. The adjustment could be material.
(B)LONG-TERM DEBT
On November 8, 1993, the Company filed a registration statement with
the Securities and Exchange Commission on Form S-3 to register $200.0
in debt securities. As of the date of this report $200.0 is still
available for debt issuance.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
(Millions of Dollars)
The following is a discussion and analysis of the results of operations of
the Company for the six-month periods ended June 30, 1994 and 1993.
Results of the six-month period ended June 30, 1994, are not necessarily
indicative of results for the full year.
Revenues
Total operating revenues were $563.7 for the six-month period ended June
30, 1994, and $554.2 for the six-month period ended June 30, 1993. The
increase of $9.5 consisted of the following:
Increase %
1994 1993 (Decrease) Change
Local service revenue $254.5 $241.4 $13.1 5.4%
Local service revenues increased $13.1 due to a $12.2 rate and volume
increase in local message revenues and monthly service revenues and a $1.3
volume increase in directory assistance revenues. Customer lines increased
3.8% from 1,859,141 on June 30, 1993, to 1,930,278 on June 30, 1994.
Increase %
1994 1993 (Decrease) Change
Network access revenue
Interstate access $121.4 $116.9 $ 4.5 3.8%
Intrastate access $ 41.6 $ 44.9 $(3.3) (7.3%)
Interstate access charge revenues increased $4.5 due to a $4.6 rate and
volume increase in end user revenues, a $1.8 decrease in National Exchange
Carriers Association ('NECA') transitional funding, and a $1.5 volume
increase in special access revenues. These increases were partially offset
by a $2.3 rate decrease in traffic sensitive revenues and a $0.7 rate
decrease in special access revenues.
Intrastate access revenues decreased $3.3 primarily from a $6.7 decrease in
switched access revenues caused by rate decreases. This decrease was
partially offset by a $3.5 volume increase in switched access revenues.
Increase %
1994 1993 (Decrease) Change
Long distance revenue $96.5 $101.5 ($5.0) (4.9%)
Long distance revenue decreased $5.0 due to a volume decrease resulting
from the implementation of extended community calling plans.
Increase %
1994 1993 (Decrease) Change
Miscellaneous revenue -
net $49.7 $49.5 $0.2 0.4%
Miscellaneous revenues increased $0.2 due to an increase in Inside Wire
revenues.
Operating Expenses
Operating expenses were $475.7 in 1994 and $425.1 in 1993. The increase of
$50.6 consisted of the following:
Increase %
1994 1993 (Decrease) Change
Depreciation $94.6 $91.3 $3.3 3.6%
Depreciation increased $1.7 due to the amortization of a reserve deficiency
authorized by the Public Service Commission of Wisconsin ('PSCW'). The
remaining increase is due to increase in plant.
Increase %
1994 1993 (Decrease) Change
Employee related expenses$122.1 $127.0 ($4.9) (3.9%)
Employee related expenses decreased $11.1 due to decreases in wages,
salaries, and other employee expenses related to force reductions. On June
30, 1994, the Company had 4,971 employees compared to 5,542 on June 30,
1993, a decrease of 571 employees. This decrease was partially offset by
wage and salary increases of $3.6, incentives and bonus increases of $1.5
and overtime increases of $1.1.
Increase %
1994 1993 (Decrease) Change
Restructuring charge $53.0 $ -- $53.0 N/A
As more fully discussed in Note A to the Financial Statements, Ameritech
(the Company's parent) announced on March 25, 1994, that it will reduce its
nonmanagement work force by 6,000 employees by the end of 1995, including
approximately 600 at the Company. Reduction of the work force results
from technological improvements, consolidations, and initiatives identified
by management to balance its cost structure with emerging competition.
This program resulted in a first quarter 1994 charge of $53.0 ($31.7 on an
after-tax basis). A significant portion of the program's cost will be
funded by the Ameritech Pension Plan, whereas financial incentives to be
paid by the Company will require Company funds of approximately $13.3.
Settlement gains of an estimated $20.0, which result from lump-sum payments
from the Ameritech Pension Plan, will be reflected in income as payments
are made by the Ameritech Pension Plan (none recorded as of June 30, 1994).
Settlement gains are noncash in nature and result from the funded status of
the Ameritech Pension Plan.
Ameritech originally advised the Company that it expected approximately two-
thirds of the 600 employees would leave the payroll in 1994 with the
balance departing by the end of the third quarter of 1995. One hundred and
fourteen employees left the payroll in the second quarter of 1994 under
this plan. As previously discussed in Note A, the program has generated
more requests to leave the payroll than originally planned requiring
revision to the expected number and timing of employees leaving the payroll
which should be quantified in the third quarter of 1994. Ameritech will
manage the departure of all employees to minimize disruption within
its business and to its customers. Cash requirements of the Company to
fund the financial incentives (principally contractual termination
payments) will be met as prescribed by applicable collective bargaining
agreements. Certain of these collective bargaining agreements require
contractual termination payments to be paid to employees in a manner other
than lump-sum, thus requiring cash payments beyond an employee's
termination date.
The Company believes this program will reduce its employee-related costs by
approximately $50,000 per terminated employee on an annual basis. However,
these anticipated savings may be partially offset by growth in new
businesses and the cost of adding other employees with different skills.
Increase %
1994 1993 (Decrease) Change
Taxes other than income
taxes $30.8 $30.6 $0.2 0.6%
The increase in taxes other than income taxes results from an increase in
revenues and gross receipts tax rates during the six-month period ended
June 30, 1994.
Increase %
1994 1993 (Decrease) Change
Other operating expenses$175.2 $176.2 ($1.0) (0.6%)
The $1.0 decrease in other operating expenses resulted primarily from a
$6.7 decrease in independent company access charges. Also contributing to
the decrease was a $2.2 decrease in materials and supplies expense and a
$1.0 decrease in contract services. These decreases were partially offset
by a $7.4 increase in affiliated billings for the Company's allocation of
common Ameritech costs and a $1.6 decrease in advertising costs.
Interest Expense, Other Expenses, and Income Tax Expense
Increase %
1994 1993 (Decrease) Change
Interest expense $13.4 $16.5 ($3.1) (18.8%)
The decrease in interest expense is due to the retirements in 1993 of
$300.0 in long-term debt, bearing interest ranging from 8% to 8-3/4%. This
debt was refinanced with short-term debt with Ameritech, which bears lower
interest rates, and $150.0 of long-term debt bearing interest at 6-3/4%.
Increase %
1994 1993 (Decrease) Change
Other (income)/expense ($1.9) ($0.8) $1.1 N/A
The increase in other income is due to interest income of $1.0 related to
amended state sales tax returns for the years 1986 through 1990.
Increase %
1994 1993 (Decrease) Change
Income tax expense $27.6 $40.1 ($12.5) (31.2%)
The decrease in income tax expense is due primarily to the first quarter
restructuring charge of $53.0. Tax on this charge amounted to $21.3. This
decrease was partially offset by increased taxable income.
Other Information
Effects of Regulatory Accounting
The Company presently gives accounting recognition to the actions of
regulators where appropriate, as prescribed by Statement of Financial
Accounting Standards No. 71, "Accounting for the Effects of Certain Types
of Regulation" (SFAS No. 1). Under SFAS No. 71, the Company records
certain assets and liabilities because of actions of regulators. Further,
amounts charged to operations for depreciation expense reflect estimated
useful lives and methods prescribed by regulators rather than those that
might otherwise apply to unregulated enterprises. The Company cannot
presently quantify, without a complete historical assessment of its
competitive and regulatory environments, what the financial statement
impact would have been had depreciation expense been determined absent
regulation.
In the event the Company determines that it no longer meets the criteria
for following SFAS No. 71, the accounting impact to the Company would be an
extraordinary noncash charge to operations of an amount which would likely
be material. Criteria that give rise to the discontinuance of SFAS No. 71
include (1) increasing competition which restricts the Company's ability to
establish prices to recover specific costs, and (2) a significant change in
the manner in which rates are set by regulators from cost-based regulation
to another form of regulation. The Company periodically reviews these
criteria to ensure that continuing application of SFAS No. 71 is
appropriate.
State Regulatory Matters
On June 23, 1994, the Telecommunications Information Superhighway bill was
passed by the Wisconsin Legislature, and signed into law by the Governor on
July 5, 1994. This legislation allows the telecommunications utilities to
choose to replace traditional rate of return regulation with price
regulation. The Company is to adopt price regulation, effective September
1, 1994. Price regulation requires large telephone companies in the state,
such as the Company, to set intrastate access rates, excluding the carrier
common line charge, no higher than interstate rates; the Company will
mirror interstate access rates. In addition, the legislation requires the
Company to reduce basic residential and small business access line rates by
10%, effective September 1, 1994. Other highlights of the legislation
include: establishment of a Universal Service Fund to ensure affordable
service to low-income customers, and rural and high-cost areas of
Wisconsin; a commitment by the Company to invest $700 million in new
equipment and technology during the next five years; establishment of an
Advanced
Telecommunications Foundation to fund advanced telecommunications
technology projects and educate consumers about advanced services; and
inclusion of consumer and privacy protections.
On July 7, 1994, the Public Service Commission of Wisconsin issued an order
in Phase III of its Investigation Into the Extent of Competition in the
IntraLATA Toll Telecommunications Market and of the Level of Regulation for
IntraLATA Toll Telecommunications Service. This order continues the trend
of opening markets to competition by requiring all local exchange companies
in Wisconsin, as a matter of general policy, to provide intraLATA 1+
dialing and presubscription as soon as possible.
Ameritech Caller ID, a service which lets customers see the telephone
number of incoming calls by using a display device, was made available to
the Company residence and small business customers beginning July 5, 1994.
Ratio of Earnings to Fixed Charges
The following table sets forth the ratio of earnings to fixed charges of
the Company for the periods indicated:
Six Months Ended
June 30, Year Ended December 31,
1994 1993 1993 1992 1991 1990 1989
5.97 6.94 6.78 4.70 4.31 4.57 4.00
The ratio in 1994 was adversely affected by a first quarter pretax charge
of $53.0 for work force restructuring (see prior discussion of this
charge). This charge will be primarily funded from the Ameritech Pension
Plan. The Company believes its ratio in 1994 is not indicative of a
significant change in its ability to fund its debt.
PART II - OTHER INFORMATION
(Millions of Dollars)
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(12) Computation of ratio of earnings to fixed charges.
(b) Reports of Form 8-K
No form 8-K was filed by the registrant during the quarter for
which this report is filed.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Wisconsin Bell, Inc.
Date August 12, 1994 Richard H. Witte
Richard H. Witte
Vice President
and Comptroller
(Principal
Financial
Officer)
EXHIBIT 12
WISCONSIN BELL, INC.
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(Millions of Dollars)
For the 6 Months Ended
June 30, 1994 June 30, 1993
1. EARNINGS
a) Income before interest expense 62.3 89.8
b) Federal and state income taxes 27.6 40.1
c) Portion of rental expense
representative of the
interest factor (A) 2.0 2.6
Total 1(a) through 1(c) $91.9 $132.5
2. FIXED CHARGES
a) Total interest expense
including interest on capital
lease obligations $13.4 $16.5
b)Portion of rental expense
representative of the
interest factor (A) 2.0 2.6
Total 2(a) through 2(b) $15.4 $19.1
3. RATIO OF EARNINGS TO FIXED CHARGES 5.97 6.94
(A)The Company considers one-third of rental
expense to be the amount representing interest.
(B)The results for the first quarter of 1994
reflect a $53.0 pre-tax charge for work force restructuring (see
MD&A discussion of this charge). This charge will be funded
primarily from the Ameritech Pension Plan.
